More than half of the ETFs in the Vanguard sector are within 3% of all-time highs. Here is my top pick to buy now

The S&P500 consists of 11 sectors, and Vanguard has a low-cost exchange-traded fund (ETF) for each of them. Each ETF incurs just a 0.1% expense ratio, or a $1 annual fee for every $1,000 invested.

The Vanguard Information Technology ETF, Vanguard Industrials ETF, Van Consumer Staples ETF, Van ETF materials, Van ETF financial fundsAND Van Health Care Fund all are down less than 3% from their all-time highs. Strong performance in growth and value-oriented sectors indicates a broad-based rally in the stock market.

Each sector has its advantages and disadvantages, but currently my top pick to buy is Renowned Vanguard consumer ETF (video recorder 0.59%), which has been one of the weaker sectors since the beginning of the year and is down almost 15% from its all-time high. Here’s why you should buy the dip in the consumer discretionary sector.

Justified sale

The consumer goods sector is one of the easiest to understand because it includes many consumer-facing businesses. The five largest holdings are Amazon, Tesla, home warehouse, McDonald’sAND Lowe. Together, they make up 46.9% of the Vanguard Consumer Discretionary ETF.

The fund includes car manufacturers, restaurants, etc Chipotle Mexican Grillhotel and tourism companies such as Airbnbclothing brands such as Lululemon Athleticcruise lines and various retail outlets Ross Stores Down Tractor delivery, O’Reilly Automotive, AutoZoneand more.

The term “discretionary” can be a bit misleading because it implies a choice in spending rather than a need. Ultimately, you could argue that purchasing a replacement car battery from AutoZone is more of a necessity than a discretionary expense.

However, generally speaking, companies in this sector rely on consumers to spend money on expenses after what is absolutely necessary for life (food, household essentials, etc.). That’s why you’ll find it Walmart AND Procter & Gamble in the Vanguard Consumer Staples ETF.

Discretionary consumer solutions can be a double-edged sword. When an economic boom is fueled by consumer spending and business growth, spending on goods, services, travel, etc. tends to increase. This leads to big-ticket purchases like a new vehicle, buying Lululemon clothing instead of a cheaper option, doing a much-needed home renovation – for thing Home Depot and Lowe’s etc.

VGT data by YCharts

One of the major cracks in the broader market rally is the economic health of the average consumer. Companies that predominantly have business-to-business sales generally perform better than companies that focus on business-to-business relationships. For example, Nvidia AND Microsoft grow during Applewages are stagnant. General Electric is hovering around the highest level in 52 weeks Great courier service remains above its 52-week low.

Businesses that serve consumers are more vulnerable if they have any product mix. For example, Walmart AND Objective recently reported earnings, with Walmart hitting an all-time high and up more than 24% year-to-date, while Target fell 8% on the day of the report.

Beware of short-term headwinds

Despite its recent problems, the Vanguard Consumer Discretionary ETF has enjoyed long-term success and ranks second in total return over the past 10 years behind the Vanguard Information Technology ETF. Total return includes both capital gains and dividends.

VGT Total Return Data by YCharts

The set-up looks bad in the short term, but consumer goods is a sector that tends to generate excess growth during periods of economic expansion. It is a major bet on the American economy and the best American brands. Many of these companies have expanded overseas and have enormous growth potential from consumers in developing countries.

If you believe in the rebounding power of American consumers and global economic growth that benefits American companies, this sector is right for you.

Despite decades of unfavorable economic conditions, the sector may continue to underperform while interest rates remain high. A few months ago, there were hopes that the Federal Reserve would begin cutting interest rates in the first half of the year. However, the first half of the year is coming to an end and there is currently no timetable for whether the Fed will lower interest rates at all in 2024.

Higher interest rates make it more expensive to borrow money, which increases high-cost items like mortgages, car payments and credit card fees. I am in favor of a long-term approach to this sector, but I must admit that there are some disturbing graphs. The chart below shows the 20-year change in US credit card debt and the constant rate of housing affordability in the US.

U.S. credit card debt data from YCharts

An index level of 100 means that an average-income family has exactly enough money to afford a mortgage on an average-priced home with a down payment of 20%. The level is currently around 100, which means many people cannot afford a home in these conditions. The chart shows that it is at approximately the same level as during the real estate bubble in 2008.

The U.S. Housing Affordability Continuous Index is a useful indicator because it takes into account mortgage rates and home prices. Because mortgage rates and home prices are Both reaching multi-year highs, the index indicates that the housing market is relatively unaffordable.

Macroeconomic factors, especially consumer-oriented ones, are crucial for the consumer goods sector. About 50% of monthly household spending in the U.S. goes to housing and transportation. Add to that food, personal insurance and pensions, and health care, and that’s 83% of monthly expenses. The more these expenses increase, the fewer people can afford discretionary spending.

Perfect buy and hold game.

When approaching a long-term investment opportunity, it is important to understand both the bullish and bearish arguments. The bearish case for the consumer discretionary sector is compelling and supported by troubling economic data and poor financial performance by the sector’s biggest leaders.

However, factors affecting the sector mainly revolve around interest rates and other short-term challenges. This sector may continue to show some volatility and there will be more selling from here, but if you agree with its long-term growth potential, it’s worth buying or at least adding to your watchlist.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Daniel Foelber has no position in any of the companies mentioned. The Motley Fool ranks and recommends Airbnb, Amazon, Apple, Chipotle Mexican Grill, Home Depot, Lululemon Athletica, Microsoft, Nvidia, Target, Tesla, Vanguard Real Estate ETF and Walmart. The Motley Fool recommends Lowe’s Companies, Tractor Supply and United Parcel Service and recommends the following options: January 2026 $395 Long Call with Microsoft and January 2026 $405 Short Call with Microsoft. The Motley Fool has a disclosure policy.