FDIS: Unappealing Broad Exposure To The Consumer Discretionary Sector

seekingalpha2024-09-07

mihailomilovanovic When looking at more cyclical areas of the market, the consumer discretionary sector offers great investment opportunities in the long run. While Amazon is the largest player, the ...

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While Amazon is the largest player, the ...</p>\n\n<a href=\"https://seekingalpha.com/article/4719675-fdis-unappealing-broad-exposure-to-the-consumer-discretionary-sector\">Source Link</a>\n\n</div>\n","source":"seekingalpha_fund","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>FDIS: Unappealing Broad Exposure To The Consumer Discretionary Sector</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nFDIS: Unappealing Broad Exposure To The Consumer Discretionary Sector\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-09-07 15:05 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4719675-fdis-unappealing-broad-exposure-to-the-consumer-discretionary-sector><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>mihailomilovanovic When looking at more cyclical areas of the market, the consumer discretionary sector offers great investment opportunities in the long run. While Amazon is the largest player, the ...</p>\n\n<a href=\"https://seekingalpha.com/article/4719675-fdis-unappealing-broad-exposure-to-the-consumer-discretionary-sector\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":null,"symbol_name":null,"start_time":0,"source_url":"https://seekingalpha.com/article/4719675-fdis-unappealing-broad-exposure-to-the-consumer-discretionary-sector","article_id":"2465657985","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1369227756/image_1369227756.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2465657985","pubTimestamp":1725692721,"columns":[],"sourceInfo":{"source_id":"seekingalpha_fund","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"mihailomilovanovic When looking at more cyclical areas of the market, the consumer discretionary sector offers great investment opportunities in the long run. While Amazon is the largest player, the o","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{},"translate_title":"外国直接投资：对非必需消费品行业的广泛投资缺乏吸引力","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"XLY":1,"AMZN":1,"FXD":1,"FDIS":1,"FDN":0.9,"TSLA":0.9,"SBUX":0.7,"MCD":0.7},"content_text":"mihailomilovanovic When looking at more cyclical areas of the market, the consumer discretionary sector offers great investment opportunities in the long run. While Amazon is the largest player, the outlook for a host of companies in different industries in this sector remains generally positive, despite challenges like cost pressures and a slowing economy. The Fidelity MSCI Consumer Discretionary Index ETF (NYSEARCA:FDIS) is one of the funds covering the sector. Its performance has been positive, generally outperforming other ETFs covering the sector, but lagging the S&P 500 index and with a typically elevated volatility seen in this sector. Although I believe a fund like FDIS can continue to deliver reasonable returns in the long run, I consider a more selective allocation toward this sector appropriate as long as the macroeconomic uncertainties persist, given this sector is strongly tied to consumer confidence. That said, a fund like FDIS offering broad coverage to the consumer discretionary sector may not offer the best risk-reward approach. ETF Description & Highlights FDIS is an exchange-traded fund that provides exposure to U.S. large, mid, and small-cap companies in the consumer discretionary sector, tracking the investment results of the MSCI USA IMI Consumer Discretionary 25/50 Index. This index comprises industries in the broader consumer discretionary sector, such as automobiles, apparel, consumer services, and retail. Companies are weighted based on market capitalization, following a cap mechanism where no single constituent exceeds 25% of the index, and the total weight of all constituents with individual weights greater than 5% cannot exceed 50% of the index. FDIS has $ 1.7 billion in AUM, diversified across market cap categories, with small and micro-caps accounting for roughly 17% of holdings. As a reference, the Consumer Discretionary Select Sector SPDR ETF (XLY), the largest ETF covering the sector, is much more leaned into larger caps, with small caps representing only 1.7% of total assets. Another ETF covering this sector that will be used in the analysis for comparison is the First Trust Consumer Discretionary AlphaDEX ETF (FXD), with $1.5 billion in AUM and a stronger orientation toward mid and smaller capitalization companies, where 84% of total assets are allocated. As of August 30, 2024, FDIS's top ten holdings are Amazon (22.1%), Tesla (11.1%), The Home Depot (6.6%), McDonald's (3.8%), Lowe's (2.6%), Booking Holdings (2.4%), TJX Companies (2.4%), Starbucks (2.0%), Nike (1.9%), and Chipotle (1.4%), making up 56% of the fund, where we see heavy allocations in Amazon and Tesla, reflecting their large market caps, and meaningful positions in the home improvement retailers Home Depot and Lowe's as well.   Morningstar, consolidated by the author From an industry perspective, FDIS's largest allocation is to the Broadline Retail with 24.7% of total equities, driven by its allocation to Amazon, similar to XLY, where Amazon represents nearly 21% of holdings. The exception is FXD, with a modest allocation of only 1% to the internet retailer. The second largest allocation by industry is to Automobile Manufacturers, with 14.5%, led by a heavy position in Tesla and smaller holdings in GM and Ford at nearly 1.0%. Meanwhile, XLY has greater exposure to this segment, with 19.3% of total assets and a 15.8% allocation to Tesla. FXD is also underweight in this industry, with only 3.6%. This is followed by Restaurants, where FDIS has exposure of 10.3%, nearly the same as XLY, due to positions in MacDonald's, Starbucks, and Chipotle, with both ETFs overweight relative to FXD, which has only 4.0% invested in the segment. FDIS also has significant exposure in the Home Improvement Retail, with 9.6%, compared to 10.5% for XLY and 0.5% for FXD, and in Travel & Leisure, with holdings making up 10.3%, similar to XLY, but underweight relative to 17.9% for FXD.   Fidelity, State Street, and First Trust websites, consolidated by the author Lower Profitability Alongside Low Valuation FDIS's bias toward smaller companies has resulted in lower profitability measures for the overall portfolio compared to XLY, as measured by EBITDA and net income margins, FCF margin, and return on assets (ROA). For instance, the EBITDA margin dropped nearly 2.3%, according to my estimates, dragged down by lower exposure to large and higher-profitability companies like MacDonald's (53.5%), Booking Holdings (31.2%), Marriot International (66.1%), Hilton (53.8%), and Yum Brands (37.0%). The reverse applies to a comparison to FXD due to FXD's underweight allocation to these companies. Meanwhile, all three ETFs are well below the average profitability of S&P 500 index, given higher margins seen in sectors like technology, While the growth profiles of both FDIS and XLY are similar, FDIS trades at a relatively low price/earnings ratio of 22.17x compared to 23.8x for XLY. This is strongly influenced by FDIS's underweight allocation to Tesla, which trades at a high price/earnings ratio of 62.2x, and, to a lesser extent, by lower exposure to Chipotle (52.1x) and TJX (28.1x), while overweight positions in lower-multiple names, such as Toll Brothers (9.1x) and Williams Sonoma (16.9x), also contributed to this valuation gap.   Source: Morningstar, Seeking Alpha, and author estimates (*) Outperforming The Peer Group Amid High Volatility On the surface, the performance of the consumer discretionary sector has been positive, achieving annualized double-digit returns in the long run. However, this comes into question in the context of a bull market that has been around for most of the past ten years. That said, a comparison with the S&P 500 index shows the consumer discretionary sector lagging behind this benchmark for most of the time, where FDIS is the best performer among the group. On top of that, volatility in the sector has been historically high, surpassing other volatile areas like technology, without delivering the same price outperformance seen in that sector.   Morningstar, consolidated by the author Granted, this high volatility is driven by uncertainties within the consumer discretionary sector, with a confluence of factors in place. Firstly, on the positive side, the outlook for Amazon, by far the most prominent player in the sector, is generally positive, as it continues to expand its e-commerce business, while the AWS division benefits from growing demand for its cloud offerings. Beyond Amazon, the remaining consumer discretionary sector navigates a mixed environment. Hotels and resorts see a recovery post-pandemic, while demand for renovation and do-it-yourself offers a positive outlook for home improvement retailers. On the downside, high interest rates have cooled demand for big-ticket products, and labor and raw material costs have pressured margins for retailers and restaurants. Looking ahead, as the FED kicks off a rate-cutting cycle and inflationary pressures ease, the outlook for the sector is expected to improve. However, an economic slowdown signals a relatively challenging backdrop, as consumer confidence is key to sustaining demand for non-essential goods and services.  Based on this environment, while there are opportunities in the discretionary sector, a selective approach may be more appropriate than a broad exposure through a sector-wide fund like FDIS or XLY, as struggling areas may take a toll on overall returns over time.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.30.0","shortVersion":"4.30.0","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2465657985"}