announced by the Federal Reserve First interest rate cut in four years. Further interest rate cuts could follow, lowering borrowing costs and stimulating consumer spending on goods and services.
The Conference Board's Consumer Confidence Index just posted its biggest single-month decline since August 2021, so lower interest rates won't magically flip a switch and send consumers into a panic buying spree. Probably not. But over time, lower interest rates could help the consumer discretionary sector, which has been hit hard by inflation and rising interest rates.
A natural way to invest in this sector's recovery is through exchange-traded funds (ETFs). Vanguard Consumer Discretionary ETF (NYSEMKT: VCR). Here's why low-cost ETFs are worth buying now.
Introduction to ETFs
Vanguard offers ETFs in all 11 sectors of the stock market. Its Consumer Freedom ETF has an expense ratio of just 0.1%, a minimum investment of $1, and a yield of 0.8%. Until recent months, the consumer discretionary sector had been one of the worst-performing sectors in 2024. The Vanguard Consumer Discretionary ETF is currently on track to surpass its all-time high from late 2021.
This sector covers a wide range of industries, including online and brick-and-mortar retailers, home improvement stores, home builders, automotive companies, hotels, resorts, cruise ships, and restaurants. This sector is quite different from necessities, which focuses on basic necessities. Discretionary companies are generally more growth-oriented, while consumer staples companies are more value- and revenue-oriented.
From periodic headwinds to potential periodic tailwinds
The Vanguard Consumer Discretionary ETF's top 10 holdings give you an idea of what you can expect from the fund. However, you may be surprised to know that Amazon (NASDAQ:AMZN) and tesla (NASDAQ:TSLA) are the two most heavily weighted holdings.
Although the two companies are sometimes considered technology companies, a significant part of Amazon's business is selling goods online, and Tesla makes money from selling cars, a textbook consumer discretionary industry. There is. But Amazon Web Services and Tesla's potential in robotics, automation, and artificial intelligence could become more valuable aspects for their respective businesses in the long run.
|
company |
Vanguard Consumer Discretionary ETF Weights |
|---|---|
|
Amazon |
22.1% |
|
tesla |
11.1% |
|
home depot (New York Stock Exchange: HD) |
6.6% |
|
mcdonalds (New York Stock Exchange: MCD) |
3.8% |
|
Lowe's Companies (New York Stock Exchange: Low) |
2.6% |
|
Reservation held (NASDAQ:BKNG) |
2.4% |
|
TJX companies (New York Stock Exchange: TJX) |
2.4% |
|
starbucks (NASDAQ:SBUX) |
2% |
|
nike (NYSE:NKE) |
1.9% |
|
mercadolibre (NASDAQ:Meri) |
1.7% |
Data source: Vanguard.
The fund's top 10 stocks are all likely to benefit from lower interest rates.
Lower borrowing costs have led to more shopping online and in stores, with Amazon, MercadoLibre, nikeTJX Companies.
The auto industry is highly cyclical and can rise and fall with the overall economy. Lower interest rates reduce financing costs, making it easier for consumers to buy big-ticket items like Tesla cars.
New home sales volume is likely to increase in tandem with home improvement spending. The 30-year mortgage rate has already fallen from 7.8% last Halloween to 6.1% in less than a year. Lower mortgage rates could reduce borrowing costs and have several knock-on effects that benefit Home Depot and Lowe's.
Lower interest rates could cause spending on restaurants and travel to plummet. Booking Holdings, which owns Priceline, OpenTable, Kayak and others, is growing as consumers spend money on travel and leisure.
McDonald's and Starbucks have global footprints, especially in North America and Asia. Both companies rely on high-margin food and beverage offerings that consumers are likely to pay for if they are confident in their purchasing power.
In summary, lower interest rates have a positive impact on the sector as it encourages spending on goods and services.
Useful tools to achieve diversification
The best consumer discretionary companies have what it takes to take advantage of favorable economic conditions, accelerate growth, and withstand recessions.
Pricing power and brand recognition are essential factors in why Nike is able to sell sneakers at high profit margins and why consumers gravitate to home improvement stores and Lowe's for their home improvement needs. However, due to competition and lack of innovation, brands can fall out of favor.
Investing in ETFs is especially useful in the consumer discretionary sector because it smooths out the risk of different companies. Many investors may prefer the diversification and simplicity offered by the Vanguard Consumer Discretionary ETF.
Another approach is to use the ETF as a baseline underlying holding and build positions in your most reliable individual stocks, which may have smaller weights within the ETF.
Should I invest $1,000 in Vanguard World Fund – Vanguard Consumer Discretionary ETF now?
Vanguard World Fund – Before purchasing shares of Vanguard Consumer Discretionary ETF, consider the following:
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John Mackey, former CEO of Amazon subsidiary Whole Foods Market, is a member of the Motley Fool's board of directors. daniel ferber We have positions in Nike and Starbucks, with options on long January 2025 $100 calls on Starbucks, short November 2024 $100 calls on Starbucks, and short November 2024 $80 calls on Nike. There is. The Motley Fool has positions in and recommends Amazon, Booking Holdings, Home Depot, MercadoLibre, Nike, Starbucks, and Tesla. The Motley Fool recommends Lowe's Companies and Tjx Companies. The Motley Fool has Disclosure policy.
The Fed just cut interest rates. Here are my top Vanguard ETFs to buy right now. Originally published by The Motley Fool
