Consumption is the biggest driver of the economy, accounting for about 70% of the United States’ gross domestic product (GDP).1 But investors haven’t always had an easy and direct way to focus on all aspects of consumer spending.
“You can invest in funds that focus on the consumer discretionary or the consumer staples sectors, but these sectors do not encompass everything that households spend money on,” says Eric Clark, a portfolio manager and member of the Investment Committee for Accuvest Global Advisors.
“Consumers also spend money on technology, health care and many more goods and services that don’t fall within the traditional ‘consumer’ sectors,” he says.
The importance of focusing on consumption as an investment theme becomes even more apparent when you consider that consumers around the globe spend more than $40 trillion annually.2
Focused on big-name brands
These realizations led Eric and the team at Accuvest Global Advisors to create the Alpha Brands Index, which comprises 200 companies that benefit from consumer spending. The index includes not only companies in the consumer discretionary and consumer staples sectors, but also financial services, technology and health care firms, as well as Real Estate Investment Trusts (REITs).
Eric notes that the Alpha Brands Index does a better overall job of reflecting the importance of consumer spending to the economy than the Standard & Poor’s 500 Stock Index does. “Only 22% of the S&P 500 is companies that benefit from consumption,” he says.
The weightings of each sector in the brand index also more closely match their share of overall U.S. economic output.
Achieving that match partly influenced the decision to have the index include 200 names. “Having the sectors’ weights more closely represent their share of overall economic activity means that the performance of the Alpha Brands Index is more correlated to what is happening in the actual consumption economy than the S&P 500’s returns are,” he says.
The consumption-focused index includes some of the world’s best-known brands that cater to how people shop for good and services, how they invest, and how they spend and direct their money in myriad other ways. The companies include Coca-Cola, Disney, Home Depot and Amazon, as well as NASDAQ, Morgan Stanley, Netflix, Southwest Airlines, Marriott, and Johnson & Johnson.
The power of brands is often not fully recognized by financial analysts. But as the BrandZ “Top 100 Most Valuable Global Brands” 2019 report noted, “Companies that invest in building valuable brands may grow faster; and organic top-line growth is a great determinant of total shareholder return.”
The importance of luxury
Eric and the team knew that it was important for the Alpha Brands Index to have exposure to companies that market luxury products and services.
As he notes, household wealth is growing worldwide, reaching unprecedented levels. When you look at savings rates, it’s also clear that people like to spend a good portion of what they earn. People also want to own products and use services that have cachet. That has increased the demand for luxury items and services among not only affluent, but also middle-class, consumers.
For investors, there is the additional benefit that luxury companies have tended to be recession-proof. We believe people who can afford expensive, high-quality goods often don’t have to stop buying them in periods of overall economic weakness.
The current economic environment, with inflation potentially on the horizon, could also enhance the perennial appeal of companies focused on the luxury market. Consumers have already demonstrated they are willing to pay a premium for these goods and services, so the prospect of higher prices may not deter that appetite.
Broad exposure to luxury names
Accuvest offers investors a number of strategies that focus on the Alpha Brand Index. Eric believes the Emles Luxury Goods ETF (LUXE) offers an attractive way for investors and his firm to increase exposure to companies that serve the luxury market.
“We know the value of owning luxury brands, but it can be a challenge to determine which ones we want to include in our brand index of 200 names,” he says. “The LUXE ETF provides us with a way to gain concentrated exposure to the luxury market and to names like LVMH and Restoration Hardware. These companies have shown they can maintain their pricing power because their products are in such high demand, they are of such high quality, and consumers are willing to pay a premium for them.”
Overlooked potential
It may seem ironic that even though consumption drives nearly three-quarters of the economy, the value of focusing on consumer spending this broadly may have been overlooked by investors.
Traditionally, people have thought of consumer discretionary stock as cyclical and dependent on the state of the economy and the amount people have to spend, while consumer staples have been considered defensive because they are the products people will keep buying in any environment.
When you consider all the sectors that are influenced by household spending, Eric notes, the past rationales for investing in consumption do not seem to adequately capture the full scope of the opportunities.
While sectors like technology and biotech may get more attention because of their perceived growth potential, sectors and stocks that are driven by consumption have delivered some of the most consistently strong returns over long periods.
It’s an opportunity worth capitalizing on for investors, and Accuvest and Emles are looking to help them do that.
For important information about the fund, including holdings, please click here.