Tesla(NASDAQ: TSLA) and Amazon (NASDAQ: AMZN) are two of the most valuable U.S.-based companies. Tesla has never been a typical car company, with its lofty valuation supported by the potential of its technological developments and robotics. Similarly, Amazon got its start in e-commerce, but Amazon Web Services is arguably the most valuable aspect of the business today.
And yet, both Tesla and Amazon aren't in the tech sector but the consumer discretionary sector. Together, they make up over 34% of the Vanguard Consumer Discretionary ETF(NYSEMKT: VCR). Here's why the exchange-traded fund could be worth buying now.
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A historically strong performer
In mid-August, the Vanguard Consumer Discretionary ETF was the only Vanguard Sector ETF that was down in 2024. However, the fund has rallied in recent months as many top holdings like Home Depot and McDonald's have gone from market underperformers to all-time highs.
Over the last 10 years, the tech sector has dominated the broader market, led by big gains in top holdings like Apple, Microsoft, Nvidia, Broadcom, and others. But the second-best performing sector has been consumer discretionary.
VGT Total Return Level data by YCharts
The difference between consumer discretionary companies like Starbucks and Nike versus consumer staples like Procter & Gamble and Walmart is that discretionary companies sell products and services that consumers buy with extra income rather than go-to essentials like toothpaste, dish soap, etc. For example, Home Depot and Lowe's Companies make up a combined 9.5% of the Vanguard Consumer Discretionary ETF. While you could argue that home improvement projects are necessary if something breaks, both companies are considered discretionary because a big part of their product mix depends on optional decisions -- like building a new outdoor deck, painting a room a different color, installing new lighting fixtures, etc.
Consumers may be less inclined to make discretionary purchases when high interest rates and inflationary pressures hinder buying power. But when consumers have more money to spend or financing costs are lower, they may decide to finance a new car purchase, make more frequent trips to Starbucks, and buy a new pair of Nike shoes. The recent rebound across many consumer discretionary companies may be due to optimism that lower interest rates will help ease borrowing costs, lower unemployment, and help improve consumer health. However, anything could happen in the short term, and lower interest rates could cause an uptick in inflation and a recession.
A better way to approach the sector is based on its ability to capture the long-term growth of the global economy.
Capturing global economic growth
The consumer discretionary sector has historically done well because of the prosperity of U.S. consumers and the global influence of U.S. brands on consumers worldwide. The future growth of McDonald's, Starbucks, and Nike is more about the growing middle class abroad than in the U.S. The sixth-largest component of the Consumer Discretionary ETF, Booking Holdings, benefits when consumers travel using its services, such as priceine.com or OpenTable. Airbnb, Marriott International, and Hilton Worldwide benefit from business travel and leisure spending.
The consumer discretionary sector is a great way to capture these multidecade growth trends through the lens of top brands. But again, what makes the Vanguard Consumer Discretionary ETF so unique is that it also holds Amazon and Tesla, giving investors exposure to trends such as e-commerce, cloud infrastructure, renewable energy, electric vehicles, robotics, automation, and artificial intelligence.
Given its focus on growth, the consumer discretionary sector doesn't have as high of a yield as safer and stodgier sectors like consumer staples, utilities, or healthcare. It also tends to be a more volatile sector, especially if top holdings sell off.
A compelling buy now
With a 0.1% expense ratio, the Vanguard Consumer Discretionary ETF is a low-cost way to invest in top companies that can continue to grow in lockstep with the global economy.
The fund may be particularly attractive for investors who want to target various industries, from retail to restaurants, home improvement travel, apparel, and more.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Daniel Foelber has positions in Nike and Starbucks and has the following options: long January 2027 $70 calls on Nike. The Motley Fool has positions in and recommends Airbnb, Amazon, Apple, Booking Holdings, Home Depot, Microsoft, Nike, Nvidia, Starbucks, Tesla, and Walmart. The Motley Fool recommends Broadcom, Lowe's Companies, and Marriott International and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
