Investing in consumer discretionary stocks

A dynamic sector of the market that relies on a good economy.

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The consumer discretionary sector is chock full of luxury. These non-essential goods, products and services carry popular designer names like Michael Kors and Ferrari, and also include restaurants, coffee shops and golf courses. This sector performs well during a robust economy, but Australians should be wary about investing in consumer discretionary stocks during a downturn as people tend to cut this spending first.

What are consumer discretionary stocks?

The consumer discretionary sector is one of 11 sectors of the stock market. These businesses include products and services that consumers may want, but don’t necessarily need. For example, high-end clothing, big-screen televisions, family vacations and sporting goods fall under this category. Consumers usually purchase these non-essential goods or services when they feel confident about their finances and have some disposable income.

What industries does it include?

With products that range from cars to lipstick, the consumer discretionary sector covers a vast range of industries.

  • Automobiles. Companies that manufacture cars, trucks, motorcycles and scooters.
  • Hotels, restaurants and leisure. The service industry includes food and drink establishments, lodging and recreational activity venues such as theme parks.
  • Household durables. Residential products like furniture and appliances.
  • Multiline retail. Stores that offer diversified products, such as Harvey Norman.
  • Textiles, apparel and luxury goods. Manufacturers of clothing, accessories and luxury goods, such as Hermès designer handbags and Givenchy leather shoes.
  • Leisure products. These vendors of recreational products and equipment include sports gear and toys.

Consumer discretionary stocks vs. consumer staples stocks

Consumer discretionary stocks offer products or services that people enjoy, but can live without. Consumer staples are things we need, such as food, beverages, household essentials and hygiene products like toilet paper.

No matter how the economy is doing, you’ll always stock your house with consumer staples. But in a waning economy, you might eliminate the nonessentials.

How to invest in the consumer discretionary sector

There are two ways to invest in the consumer discretionary sector in Australia: individual stocks or exchange-traded funds (ETFs). When you invest in a particular consumer discretionary stock, you buy shares of the company. There are fewer fees, but more risk involved. If you go the ETF route, you’ll get a basket of consumer discretionary stocks, which come with higher fees but diversifies your portfolio and lowers your exposure risk.

A breakdown of how to get started in Australia:

  1. Pick a brokerage. Browse different brokerage platforms in Australia to choose a firm that suits your investing needs.
  2. Open an account. Most firms let you open a brokerage account online. Some accounts require a deposit to open, while others let you fund your account right before investing.
  3. Shop for securities. Use your platform’s research programs to examine different stocks and ETFs.
  4. Place an order. Give the order to buy the security.
  5. Track your portfolio. Monitor your investments by logging into your brokerage account.

What stocks are in the consumer discretionary sector?

What ETFs track the consumer discretionary sector?

A few popular ETFs that follow the sector include:

  • Vanguard Consumer Discretionary ETF (VCR)
  • ETFs Fang+ (FANG)

How is consumer discretionary sector performing?

Use the graph below to see how the Consumer Discretionary Select Sector SPDR ETF (XLY) is currently performing, as well as how it has been performing over the last three months, year and five years.

Why invest in the consumer discretionary sector?

Consumer discretionary stocks have the potential for high returns, especially when the economy is strong. For example, during the start of the longest economic expansion in US history, the S&P 500 Consumer Discretionary Index returned 41.3% in 2009, compared to the S&P 500 Index’s 26.5%. And it continued to bring in consistently higher returns for many years.

Another benefit of the consumer discretionary sector is that it’s easier for investors to gauge entry into the market. Since consumer discretionary stocks perform in tandem with the economy, Australian investors can monitor economic indicators, such as the gross domestic product (GDP), to judge whether it might be a good time to start investing.

How are the dividends for consumer discretionary stocks?

Consumer Discretionary stock dividends are usually comparable to the rest of the market. But economic downfalls can lead to dividend cuts.

For example, in September 2019, the SPDR S&P Retail ETF (XRT) had a yield of 1.99%, compared to the S&P 500 Index’s (SPY) 1.97%. But just a few months later, the COVID-19 pandemic forced consumers to stay at home and shut down major retailers, hotels and restaurants.

Many stocks plummeted, affecting dividend payouts as well. In June 2020, the SPDR S&P Retail ETF (XRT) had a yield of 0.86%, steeply trailing the S&P 500 Index’s (SPY) dividend of 1.75%.

What unique risks does the consumer discretionary sector face?

Economic cycles have a big hand in how consumer discretionary stocks perform. Since this sector is extremely unpredictable, here are a few things to watch out for:

  • Weak economy. The sector suffers in a declining economy, especially when there are high rates of unemployment. Consumers tend to tighten their spending and reduce luxury goods from their budget.
  • High interest rates. Consumers often purchase more expensive products, such as cars or jewelry, on credit. High credit card interest rates are harder on customers and may deter spending.
  • Poor consumer confidence. How people feel about the economy plays a key role in consumer spending. A positive outlook can lead to more spending, whereas a loss in confidence usually means that consumers are saving rather than spending. For example, when consumer confidence was at an all-time low in 2009 following the Great Recession, all major areas of spending — except healthcare — dropped an average of 2.8%, according to the US Department of Labor.

Compare stock trading platforms

You'll need a brokerage account to buy stocks or ETFs in Australia. Use the table below to compare your options and find the best fit.

Name Product Standard brokerage fee Inactivity fee Markets International
eToro Share Trading (US stocks)
US$0
US$10 per month if there’s been no login for 12 months
US shares, ETFs
Yes
Zero brokerage share trading on US stocks with trades as low as $50.
Join the world’s biggest social trading network when you trade stocks, commodities and currencies from the one account.
Superhero share trading
$5
No
ASX shares, ETFs
No
Pay zero brokerage on all Australian ETFs.
Trade ASX stocks with a flat $5 commission fee and a low minimum investment of just $100.
ThinkMarkets Share Trading
$8
No
ASX shares, ETFs
No
Limited offer: Get 5 free ASX trades when you open a new account with ThinkMarkets before June 30, 2021 (T&Cs apply).
Buy and sell CHESS sponsored ASX shares with $0 brokerage on your first 5 trades. Only $8 flat fee brokerage thereafter, plus enjoy free live stock price data on an easy to use mobile app.
Bell Direct Share Trading
$15
No
ASX shares, mFunds, ETFs
No
⭐ Finder Exclusive: Get 5 free stock trades and unlimited ETF trades until July 31, 2021 when you join Bell Direct.
Bell Direct offers a one-second placement guarantee on market-to-limit ASX orders or your trade is free, plus enjoy extensive free research reports from top financial experts.
IG Share Trading
Finder Award
IG Share Trading
$8
$50 per quarter if you make fewer than three trades in that period
ASX shares, Global shares
Yes
$0 brokerage for US and global shares plus get an active trader discount of $5 commission on Australian shares.
Enjoy some of the lowest brokerage fees on the market when trading Australian shares, international shares, plus get access to 24-hour customer support.
Saxo Capital Markets (Classic account)
$6.99
No
ASX shares, Global shares, Forex, CFDs, Margin trading, Options trading, ETFs
Yes
Acess 19,000+ stocks on 37 exchanges worldwide
Low fees for Australian and global share trading, no inactivity fees, low currency conversion fee and optimised for mobile.
CMC Markets Stockbroking
$11
No
ASX shares, Global shares, mFunds, ETFs
Yes
$0 brokerage on global shares including US, UK and Japan markets.
Trade up to 9,000 products, including shares, ETFs and managed funds, plus access up to 15 major global and Australian stock exchanges.
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Compare up to 4 providers

Important: Share trading can be financially risky and the value of your investment can go down as well as up. “Standard brokerage” fee is the cost to trade $1,000 or less of ASX-listed shares and ETFs without any qualifications or special eligibility. If ASX shares aren’t available, the fee shown is for US shares. Where both CHESS sponsored and custodian shares are offered, we display the cheapest option.

Disclaimer: The value of any investment can go up or down depending on news, trends and market conditions. We are not investment advisers, so do your own due diligence to understand the risks before you invest.

Bottom line

The consumer discretionary sector may be a good choice when the economy is growing and consumers feel good about their job and finances. But tread carefully when the economy starts trending down.

Compare online trading platforms to find a brokerage firm when you’re reading to start investing.

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