<< For Part 1, see S&P 500 Sector ETFs: A Look Under the Hood, Part 1

Consumer Discretionary Select Sector SPDR (XLY)

The Consumer Discretionary Select Sector SPDR ETF (XLY) has been a real standout performer among the Select Sector ETFs, and one of the most consistent. It’s leading the pack year to date with returns of about 5.3%, and its returns over the past three, five and 10 years, as well as since inception, place it near the top over each time period.

The strong performance is all the more remarkable given that it has covered a period of time that saw two deep recessions, two major wars and the highest unemployment rates since the Great Depression. There was simply no stopping American consumers from swiping their credit cards.

When you buy XLY, you’re getting some of the major corporate names you might expect, including theme-park operator and TV and movie studio Walt Disney Co (DIS), which is the largest holding at 7% of the portfolio. You also get some of the larger retail chains like Home Depot Inc (HD), Lowe’s Companies, Inc (LOW) and Target Corporation (TGT) and more frivolous places to drop a few quick bucks like Starbucks Corporation (SBUX) and Chipotle Mexican Grill, Inc (CMG).

But you also get some less intuitive fit. There are consumer staples-esque stocks, such as discount chain Dollar Tree (DLTR). You’ll also find automakers General Motors (GM) and Ford (F), media giants Comcast (CMCSA) and Time Warner (TWX), and Amazon.com (AMZN), a company that is as much a tech stock as it is a retailer.

Stocks that you might think of as true “discretionaries,” like high-end jewelry and fashion, don’t make up a significant part of the portfolio at all.

XLY is full of high-quality names you come across in your daily life, most of which can fairly be considered “consumer discretionary.” But given the mismatched collection of companies that fill out the ETF, it is by no means a pure play.

Consumer Staples Select Sector SPDR (XLP)

Next up is the Consumer Staples Select Sector SPDR (XLP), XLY’s ugly stepsister.

I’m joking, of course. The staples ETF is more conservative than the discretionaries ETF and most of its holdings less flashy, but it is full of names we all know and love. Procter & Gamble Co (PG) — the ultimate seller of disposable sundries — is the largest holding at 12.5% of the portfolio. The Coca-Cola Co (KO), Wal-Mart Stores, Inc (WMT), Philip Morris International (PM) and CVS Health Corp (CVS) also make up a good slice of the portfolio.

There are a few head scratchers here. I’m not sure why Target and Dollar Tree are “discretionaries” while Walmart is a “staple.” I also find it odd that a luxury grocer like Whole Foods Market, Inc (WFM) or a whiskey maker like Brown-Forman Corporation (BF.B) are considered staples. (I mean, I suppose you could argue Jack Daniel’s and organic pomegranate farmed by the hard-working indigenous famers of Kerplackistan are essential to life.) But for the most part, the holdings of XLP make sense.

Yet despite XLP’s conservative portfolio — and despite the fact that its loaded with some of the highest-yielding stocks on the market, such as tobacco stocks — XLP yields only a modest 2.4% in dividends. If you’re looking for yield, you’re better off poaching some of XLP’s higher-yielding holdings than holding the ETF outright.

>> Continue to Part 3