A sound investment process and strong management team underpin Vanguard Consumer Discretionary ETF's Morningstar Medalist Rating of Gold. The portfolio maintains a cost advantage over competitors, priced within the lowest fee quintile among peers.  

 The strategy's sensible investment philosophy merits a High Process Pillar rating. Independent of the rating, analysis of the strategy's portfolio shows it has maintained an underweight position in quality exposure and yield exposure compared with category peers. Low quality exposure is attributed to stocks with higher financial leverage and lower profitability. And a low yield exposure is rooted in holding fewer stocks with high dividend or buyback yields -- instead, typically holding stocks in an early stage of development. The equity team managing the passive product drives the strategy's Above Average People Pillar rating. The strategy is part of a first-rate parent that has a favorable lineup success ratio and overall low fees. These attributes support its High Parent Pillar rating.

Analyst Rating

Amazon

Tesla

Home Depot

McDonald's

Lowe's

NIKE

Booking Hlds

Starbucks

O'Reilly Automotive

Morningstar's evaluation of this security's process aims to determine the likelihood that it will outperform its Morningstar Category index on a risk-adjusted basis over the long term. Vanguard Consumer Discretionary Fund earns a High Process Pillar rating. This fund tracks an index, which supports the rating. Historical data, like Morningstar's Active/Passive Barometer, shows that passively managed funds have generally outperformed their active counterparts, especially over longer time horizons.

The investment strategy as stated in the fund's prospectus is:  The investment seeks to track the performance of the MSCI US Investable Market Index/Consumer Discretionary 25/50.  The fund employs an indexing investment approach designed to track the performance of the MSCI US Investable Market Index/Consumer Discretionary 25/50, an index made up of stocks of large, mid-size, and small U.S. companies within the consumer discretionary sector, as classified under the GICS. The Advisor attempts to replicate the target index by seeking to invest all of its assets in the stocks that make up the index, and in order to hold each stock in approximately the same proportion as its weighting in the index. It is non-diversified. 

 The portfolio is overweight in consumer cyclical by 14.4 percentage points in terms of assets compared with the category average, and its energy allocation is similar to the category. The sectors with low exposure compared to category peers are industrials and consumer defensive, underweight the average by 6.5 and 3.6 percentage points of assets, respectively. The portfolio is positioned across 312 holdings and is relatively concentrated. Specifically, 61.3% of the strategy's assets are housed within the top 10 holdings, as opposed to the typical peer's 48.6%. And finally, in terms of portfolio turnover, this portfolio turns over its holdings less quickly than peers, potentially leading to lower costs for investors and eliminating a drag on performance.

High

Process

Vanguard Consumer Discretionary Fund's strong equity team drives the strategy's Above Average People Pillar rating. There are two managers listed on the fund: Awais Khan, Nick Birkett. The team is inadequately equipped. Together, they average four years of portfolio management experience. Together, they manage a total of two strategies, with a Gold asset-weighted average Morningstar Medalist Rating, indicating the potential to deliver positive alpha relative to the category median in aggregate.  

 Note: This People Pillar rating is indirectly assigned by an analyst. Morningstar analysts evaluate the People Pillar for passive products at the brand level and may also differentiate by asset class. There is at least one other passive strategy at the firm that is covered by a Morningstar analyst, so the People Pillar rating of the fund is inherited from the rating that the Morningstar analyst assigned to investment vehicles under the same brand name.

Above Average

People

The Vanguard Group retains a High Parent rating. 

Mutual ownership, low costs, and a direct-to-investor playbook have helped spur Vanguard's leadership within the United States. Client service missteps notwithstanding, Vanguard over the past decade has grown its market share of U.S. open-end and exchange-traded fund assets at about a 5% annualized clip. At that rate, Vanguard's portion of the U.S. industry will cross 50% around 2035.

True, some competitors can now match or even undercut Vanguard on fees for broad market exposure. But Vanguard's burgeoning advice business could help it keep or even extend that lead. Through Digital Advisor and Personal Advisor Services, Vanguard has built an increasingly compelling ecosystem of advice for investors with simple to complex needs.

Vanguard is also using its advice business to expand overseas, but that's a work in progress. Of Vanguard's USD 7.6 trillion in global assets under management in March 2023, non-U.S. investors owned less than 10%, a figure that has changed little in recent years. Strategic shifts in China and other markets account for the slow pace, including returning money to institutions that had been layering on fees. Vanguard hopes to recoup that money and more by focusing on individual investors and the advisors who serve them. Provided Vanguard sticks to its playbook, its advantages should translate into success abroad, too.

Parent

Vanguard Consumer Discretionary ETF

VCR tracks a market-cap-weighted index of stocks in the US Consumer Discretionary sector.

The fund tracks a market cap-weighted index of consumer discretionary companies in the US.

The consumer discretionary sector is close to 11-year averages regarding valuation metrics. Durables/apparel and consumer services look attractive, whereas the auto/components industry is overvalued. Consider VCR as an alternative to XLY.

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Key indicators suggest that the Vanguard Consumer Discretionary Index Fund ETF Shares year to date surge was premature. Although market-based variables imply that cyclical stocks are set to outperform, we think the VCR ETF's strong year to date performance is unwarranted. Vanguard Consumer Discretionary Index Fund ETF Shares portfolio managers provide solid long-term risk-adjusted returns. However, that alone is unlikely to substantiate its year to date returns.

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