Fidelity MSCI Consumer Discretionary Index ETF (FDIS)

The Fidelity MSCI Consumer Discretionary Index ETF (FDIS) holds the shares of companies that sell non-essential goods and services — automobiles, apparel, restaurants, entertainment, home furnishings — and tracks a broad index of that sector.

The origins of FDIS and index funds in consumer stocks

Fidelity began as an active stock-picking powerhouse — the firm built its reputation on portfolio managers like Peter Lynch, who beat the market through security selection. But by the 1990s, evidence mounted that most active managers could not consistently beat passive index funds after fees. Fidelity adapted, launching a suite of low-cost index funds to serve investors who wanted broad market exposure without paying for (often unsuccessful) active management.

FDIS is one of many index funds Fidelity offers. It follows a strategy of buying a basket of stocks meant to match the MSCI USA Consumer Discretionary Index — an index constructed by the index publisher MSCI that includes all large and mid-cap American consumer-discretionary companies. Rather than paying portfolio managers to pick the “best” consumer stocks, the fund simply owns all of them, proportional to their market value, and rebalances periodically to stay in sync with the index. This mechanical approach keeps fees low — FDIS charges far less than an actively managed consumer fund would — and removes the risk (and hope) that the managers will beat the market through stock-picking.

The rise of passive indexing transformed the industry. Today, the majority of new money flowing into equity funds goes into index funds and index-tracking ETFs rather than actively managed accounts. FDIS is a product of that shift: it is a bet that investors are willing to accept market-level returns in exchange for low fees and the certainty that they will not underperform their benchmark.

What counts as consumer discretionary?

Consumer discretionary, in financial terminology, means products and services that people buy with their leftover income — after they have already purchased necessities like food, utilities, and shelter. A home is a necessity; a vacation is discretionary. Gasoline is a necessity; a sports car is discretionary (even though it also transports you). A basic phone is a necessity; a luxury smartphone is discretionary.

The MSCI Consumer Discretionary Index includes everything from giant auto manufacturers like General Motors and Ford to mass-market retailers like Target and Costco to premium brands like Nike and designer houses like Tapestry to entertainment firms like Walt Disney and restaurant operators like McDonald’s and Starbucks. Some of these firms are household names; others are obscure suppliers or platform operators. What unites them is that they sell things people want when their wallets are full and cut back on when budgets tighten.

The cyclical nature of discretionary spending

Here is the defining characteristic of consumer-discretionary stocks: they are inherently cyclical. In boom times, when unemployment is low and wages are rising, consumers spend freely on clothes, cars, gadgets, restaurants, and travel. Discretionary stocks perform well, valuations expand, and the sector captures outsize gains. In recessions, spending collapses. Consumers defer car purchases, cut dining out, and pause luxury retail. Discretionary companies see earnings plummet, and their stocks crater far more sharply than the overall market.

The 2008 financial crisis illustrated this arc starkly. Auto makers and discretionary retailers saw earnings and stock prices decline 50 percent or more as credit froze and employment collapsed. The recovery was equally violent in the other direction — once credit thawed and hiring resumed, discretionary stocks soared. A 20-year investor who bought FDIS (or a passive consumer-stock fund) at the depth of 2009 and held on would have seen spectacular returns during the subsequent expansion.

This cyclicality makes FDIS not a buy-and-forget vehicle, but a tactical tool. In the early stages of an expansion, when unemployment is falling and confidence is rising, discretionary stocks tend to outperform. In the late stages of an expansion, when valuations are stretched, investors often rotate out. And at the onset of recession, discretionary is the first sector to underperform. Sophisticated investors use sector funds like FDIS to tilt their allocation based on where they believe the economic cycle is headed.

How FDIS fits into a portfolio

A typical investor might hold FDIS in one of two ways. First, as part of a diversified portfolio of many sector and category funds — combined with technology, financials, staples, energy, and other sectors to create a balanced exposure to the entire stock market. In that role, FDIS is a piece of a larger pie, and its cyclical sensitivity is averaged across the full portfolio. The second approach is tactical: an investor might overweight FDIS when they believe the economy is strengthening and underweight it in advance of a slowdown. This requires conviction about the economic cycle, which is hard to time correctly and a common source of investor mistakes.

For passive buy-and-hold investors, FDIS is most useful as part of a global allocation where sector concentration is acceptable. For market-timers, it is a tool to express a view on the economic cycle.

The costs and mechanics of ownership

FDIS trades on the NASDAQ stock exchange during regular trading hours, so it can be bought and sold in seconds at market prices. The trading cost is minimal for large positions. The fund’s ongoing expense ratio — the annual fee expressed as a percentage of assets — is low, typically less than 0.10 percent per year, which means investors pay almost nothing to own the underlying stocks.

The fund is highly liquid, with tight bid-ask spreads most of the time. During market stress — such as the March 2020 COVID crash or the 2008 crisis — even FDIS can see its bid-ask spreads widen as the underlying stocks gap in price and trading volume swings. But for most investors most of the time, FDIS is easy to buy and sell.

How a reader would research FDIS

Start with the fund’s factsheet, published by Fidelity, which lists the largest holdings (which are typically companies like Amazon, Tesla, Home Depot, and Nike, depending on their market capitalizations at the time). Compare the fund’s recent returns to the MSCI Consumer Discretionary Index itself; if FDIS is lagging badly, it may signal that the fund is not tracking the index properly, or that it is holding cash or less-liquid positions. Over the long term, FDIS should return roughly what the underlying index returns, minus a tiny fee.

An investor considering FDIS should also check the current valuation of discretionary stocks relative to their own history and to other sectors — unusually high price-to-earnings ratios might suggest that the cycle is late, and unusually low ratios might suggest value. Finally, economic data such as employment, retail sales, and consumer confidence give context for whether discretionary stocks are likely to outperform or underperform in the coming quarters.