Investing in consumer discretionary stocks

In this article, we will discuss different types of consumer discretionary stocks, highlight how to invest in them and weigh the pros and cons of investing in this sector.

What is consumer discretionary?

Consumer discretionary is a term used in the financial industry to describe businesses that provide non-essential goods and services. These are products or services that people can choose to purchase, but they are not necessary for their basic needs or survival.

The sector includes retail, entertainment, leisure, travel and luxury goods. Companies in this sector produce and sell goods and services that are considered wants rather than needs.

The overall state of the economy, consumer confidence and personal income levels influence the sector most. During periods of economic growth and high consumer confidence, people tend to spend more on discretionary items.

Investors often consider adding consumer discretionary stocks to their portfolios, as these companies have the potential for higher returns during times of economic prosperity. However, it's important to note that this sector can also be more volatile compared to other sectors due to its sensitivity to changes in consumer behaviour.

Types of consumer discretionary stocks

The consumer discretionary industry is a broad, with companies offering a wide variety of products, services and goods. As consumers, we spend our money on many different things, from clothing to cars to food and leisure. But the companies responsible for getting products to you are also considered part of this industry. Here are the most common categories of consumer discretionary companies:

Auto components

Auto components companies are involved in manufacturing parts and accessories for automobiles. This can range from engine components to electrical systems and interior accessories. Examples: Mobileye Global Inc. (MBLY), Aptiv PLC (APTV) and Magna International Inc. (MGA)

Automobiles

Automobile companies are engaged in the manufacturing, marketing and sale of vehicles. This includes both passenger cars and commercial vehicles.

Examples: Tesla (TSLA), Stellantis (STLA) and Ferrari (RACE)

Distributors

Distributors are companies that act as intermediaries between manufacturers and retailers, ensuring products reach the end consumers efficiently. They play a crucial role in supply chain management.

Examples: Fastenal (FAST), Sysco (SYY) and United Natural Foods (UNFI)

Diversified consumer services

Diversified consumer services encompass a wide range of businesses that provide various services to consumers, such as education, consulting, entertainment and leisure activities.

Examples: Naas Technology Inc ADR (NAAS) and 2U Inc (TWOU)

Hotels, restaurants and leisure

This category includes companies operating hotels, restaurants, resorts, theme parks, cruise lines and other leisure-related establishments.

Examples: Starbucks (SBUX), Marriot International (MAR) and McDonald’s (MCD)

Household durables

Household durables refer to goods used regularly within households over an extended period. This includes appliances like refrigerators, washing machines, televisions and furniture items.

Examples: VOXX International (VOXX), Samsung Electronics (SSNLF), Philips (PHIA), Sony (SONY) and Panasonic (PCRFY)

Media

The media industry involves companies engaged in the production and distribution of content through various mediums, including television, film, print and digital platforms.

Examples: Warner Bros. Discovery (WBD), Netflix (NFLX) and Paramount Global (PARA)

Retail

Retail companies revolve around the ever-evolving fashion industry. Companies in this sector cater to consumers' desire for clothing, accessories and footwear. Retailers can specialise in different product categories such as electronics, clothing, home goods, etc.

Examples: Nike (NKE) and H&M (HM-B)

Textile, apparel and luxury goods

This category encompasses companies involved in the manufacturing and sale of textiles, clothing, accessories and luxury goods.

Examples: PVH Corp (PVH), LVMH Moet Hennessy Louis Vuitton SE (LVMHF) and Levi Strauss & Co (LEVI)

How to invest in consumer discretionary stocks

Because consumer discretionary stocks cover such a wide range of companies, the investment opportunities are also quite broad. Here are some ways to invest in this industry:

1. Individual stocks: You invest in stocks within the sector and become a part owner of the company.
2. ETFs: ETFs offer diversified exposure to a basket of consumer discretionary stocks.

Keep in mind that buying consumer discretionary stocks or ETFs requires knowledge of the companies you are considering. In order to make well-informed investment decisions, consider these pointers:

• Research: Conduct thorough research into individual companies before investing. Look at factors such as financial performance, competitive landscape, management expertise and future growth potential.
• Diversify: Spread your investments across multiple consumer discretionary stocks rather than putting all your money into one or two companies. Diversification helps reduce risk and increases the likelihood of capturing positive returns.
• Monitor consumer trends: Stay informed about evolving consumer preferences and trends. Companies that can adapt to changing consumer demands are more likely to thrive in the long run.

Examples of consumer discretionary stocks

• Amazon.com Inc. (AMZN): As one of the world's largest online retailers, Amazon has consistently shown strong growth potential. The company's ability to adapt to changing consumer trends and its vast product offerings make it an attractive investment option.
• The Walt Disney Company (DIS): With its iconic brands and beloved characters, Disney is a dominant player in the entertainment industry. With its iconic brands like Disney, Marvel, Pixar, and Star Wars, Disney attracts consumers through movies, theme parks, merchandise sales, and streaming platforms like Disney+.
• Nike Inc. (NKE): Known for its innovative athletic footwear and apparel, Nike has a strong brand presence globally. The company benefits from consistent demand for sportswear across various demographics.
• Starbucks Corporation (SBUX): Starbucks is synonymous with premium coffee experiences worldwide. Its extensive global network of stores and continuous expansion efforts position it well for long-term growth.
• Tesla Inc. (TSLA): Tesla has disrupted the automotive industry and has become a leader in vehicle manufacturing over the past few years. The company's focus on sustainability and technological advancements makes it an exciting investment prospect.

Pros and cons of consumer discretionary stocks

With such a wide variety of consumer brands to choose from, it’s not hard to invest in the companies you love. But before you start investing in consumer discretionary stocks, consider this:

Pros:

• Potential for high growth: Consumer discretionary stocks can benefit from increased consumer spending during economic upturns.
• Many well-known brands: Many popular consumer brands fall under the consumer discretionary sector, so you are likely familiar with many stocks in the industry.
• Diversification opportunities: This sector offers a wide range of industries and companies, allowing for portfolio diversification.

Cons:

• Vulnerability to economic downturns: During recessions or periods of low consumer confidence, discretionary spending tends to decrease.
• High competition: The sector is highly competitive, and sales are unpredictable.
• Subject to consumer preferences: Consumer preferences can shift quickly. A brand can be popular one day and not the next.

Investing in consumer discretionary ETFs

Consumer discretionary ETFs are investment funds that hold a diversified portfolio of stocks issued by companies in industries such as retail, leisure, entertainment and automobiles. These ETFs provide investors with a convenient way to invest in a basket of consumer discretionary companies, without the need for individual stock selection.

Some consumer discretionary ETFs we offer on our platform:

Note: Some ETFs may not be available on our platform for your country (temporarily) due to regulatory reasons.