Investing in consumer discretionary stocks
A dynamic sector of the market that relies on a good economy.
We’re reader-supported and may be paid when you visit links to partner sites. We don’t compare all products in the market, but we’re working on it!
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:
- Pick a brokerage. Browse different brokerage platforms in Australia to choose a firm that suits your investing needs.
- 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.
- Shop for securities. Use your platform’s research programs to examine different stocks and ETFs.
- Place an order. Give the order to buy the security.
- 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 popular ETF that follow the sector include:
- 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.
We update our data regularly, but information can change between updates. Confirm details with the provider you're interested in before making a decision.
Important: Share trading can be financially risky and the value of your investment can go down as well as up. Standard brokerage is the cost to purchase $1,000 or less of equities without any qualifications or special eligibility. Where both CHESS sponsored and custodian shares are offered, we display the cheapest option.
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.
Frequently asked questions
More guides on Finder
7 steps to building your passive income
Setting a goal of making $200k per year passive income may seem all but unattainable, but investing experts Scott & Mina O'Neill say it's possible.
A-League fans! Here are 10 (more) reasons to get Paramount Plus
Come for the football, stay for the quality original TV.
Ethereum price gains 10% in a week – here’s why that could continue
In spite of the recent crash which saw nearly AU $400 billion being wiped out from the market, ETH has been able to register monthly gains of over 6%.
Bitcoin price continues to slide despite growing adoption
Over the course of the last 14-days, Bitcoin has registered losses of over 16%.
The Best iPhone Black Friday deals in Australia: Save $300+ on an iPhone
Top Black Friday iPhone deals include 26% off the iPhone 12 Mini at The Good Guys and cut-price refurbished models at Amazon and eBay.
Black Friday TV deals in Australia: Up to $3,000 off smart TVs
The best Black Friday 2021 discounts include over $1,000 off 75-inch and 85-inch smart TVs from Samsung and Hisense.
50 best Black Friday deals: Tech, games, beauty, fashion and more
We've handpicked the 50 best Black Friday deals available in Australia right now, including tech favourites, games, toys, beauty, homewares and more.
eBay Australia’s best Black Friday 2021 deals with up to 75% off
We've handpicked the 50 best Black Friday deals available from eBay right now, including tech, games, home appliances and more.
The Best Black Friday tech deals in Australia
Black Friday has landed, which means its time to get a deal on some fancy tech, from phones and headphones to laptops and cameras.
Best drawing tablets in Australia
Get started on your own artistic adventure with one of the best drawing tablets you can get your hands on in Australia.
Ask an Expert