LQD vs. XLY: What’s The Difference?

The iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) and the Consumer Discretionary Select Sector SPDR Fund (XLY) are both among the Top 100 ETFs. LQD is a iShares Corporate Bond fund and XLY is a SPDR State Street Global Advisors Consumer Cyclical fund. So, what’s the difference between LQD and XLY? And which fund is better?

The expense ratio of LQD is 0.02 percentage points higher than XLY’s (0.14% vs. 0.12%). LQD is mostly comprised of BBB bonds while XLY has a high exposure to the consumer cyclical sector. Overall, LQD has provided lower returns than XLY over the past ten years.

In this article, we’ll compare LQD vs. XLY. We’ll look at fund composition and performance, as well as at their risk metrics and portfolio growth. Moreover, I’ll also discuss LQD’s and XLY’s industry exposure, annual returns, and holdings and examine how these affect their overall returns.

Summary

LQD XLY
Name iShares iBoxx $ Investment Grade Corporate Bond ETF Consumer Discretionary Select Sector SPDR Fund
Category Corporate Bond Consumer Cyclical
Issuer iShares SPDR State Street Global Advisors
AUM 40.23B 20.21B
Avg. Return 6.58% 18.86%
Div. Yield 2.48% 0.63%
Expense Ratio 0.14% 0.12%

The iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) is a Corporate Bond fund that is issued by iShares. It currently has 40.23B total assets under management and has yielded an average annual return of 6.58% over the past 10 years. The fund has a dividend yield of 2.48% with an expense ratio of 0.14%.

The Consumer Discretionary Select Sector SPDR Fund (XLY) is a Consumer Cyclical fund that is issued by SPDR State Street Global Advisors. It currently has 20.21B total assets under management and has yielded an average annual return of 18.86% over the past 10 years. The fund has a dividend yield of 0.63% with an expense ratio of 0.12%.

LQD’s dividend yield is 1.85% higher than that of XLY (2.48% vs. 0.63%). Also, LQD yielded on average 12.28% less per year over the past decade (6.58% vs. 18.86%). The expense ratio of LQD is 0.02 percentage points higher than XLY’s (0.14% vs. 0.12%).

Fund Composition

Holdings

LQD - Holdings

LQD Bond Sectors Weight
BBB 50.92%
A 37.97%
AA 8.49%
AAA 2.7%
BB 0.05%
Below B 0.0%
B 0.0%
US Government 0.0%
Others -0.13%

LQD’s Top Bond Sectors are ratings of BBB, A, AA, AAA, and BB at 50.92%, 37.97%, 8.49%, 2.7%, and 0.05%. The fund is less weighted towards Below B (0.0%), B (0.0%), and US Government (0.0%) rated bonds.

XLY - Holdings

XLY Holdings Weight
Amazon.com Inc 22.9%
Tesla Inc 13.5%
The Home Depot Inc 8.74%
McDonald’s Corp 4.5%
Nike Inc B 4.45%
Lowe’s Companies Inc 3.58%
Starbucks Corp 3.44%
Target Corp 3.12%
Booking Holdings Inc 2.35%
TJX Companies Inc 2.12%

XLY’s Top Holdings are Amazon.com Inc, Tesla Inc, The Home Depot Inc, McDonald’s Corp, and Nike Inc B at 22.9%, 13.5%, 8.74%, 4.5%, and 4.45%.

Lowe’s Companies Inc (3.58%), Starbucks Corp (3.44%), and Target Corp (3.12%) have a slightly smaller but still significant weight. Booking Holdings Inc and TJX Companies Inc are also represented in the XLY’s holdings at 2.35% and 2.12%.

Risk Analysis

LQD XLY
Mean Return 0.47 1.47
R-squared 66.93 80.84
Std. Deviation 5.94 15.97
Alpha 0.52 6.96
Beta 1.62 1.02
Sharpe Ratio 0.85 1.06
Treynor Ratio 3.08 16.69

The iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) has a Beta of 1.62 with a Alpha of 0.52 and a R-squared of 66.93. Its Sharpe Ratio is 0.85 while LQD’s Mean Return is 0.47. Furthermore, the fund has a Standard Deviation of 5.94 and a Treynor Ratio of 3.08.

The Consumer Discretionary Select Sector SPDR Fund (XLY) has a R-squared of 80.84 with a Mean Return of 1.47 and a Alpha of 6.96. Its Standard Deviation is 15.97 while XLY’s Treynor Ratio is 16.69. Furthermore, the fund has a Beta of 1.02 and a Sharpe Ratio of 1.06.

LQD’s Mean Return is 1.00 points lower than that of XLY and its R-squared is 13.91 points lower. With a Standard Deviation of 5.94, LQD is slightly less volatile than XLY. The Alpha and Beta of LQD are 6.44 points lower and 0.60 points higher than XLY’s Alpha and Beta.

Performance

Annual Returns

LQD vs. XLY - Annual Returns

Year LQD XLY
2020 11.14% 29.66%
2019 17.13% 28.43%
2018 -3.76% 1.66%
2017 7.16% 22.77%
2016 5.97% 5.87%
2015 -1.08% 9.93%
2014 8.57% 9.49%
2013 -2.49% 42.74%
2012 11.68% 23.6%
2011 8.89% 5.98%
2010 9.15% 27.36%

LQD had its best year in 2019 with an annual return of 17.13%. LQD’s worst year over the past decade yielded -3.76% and occurred in 2018. In most years the iShares iBoxx $ Investment Grade Corporate Bond ETF provided moderate returns such as in 2017, 2014, and 2011 where annual returns amounted to 7.16%, 8.57%, and 8.89% respectively.

The year 2013 was the strongest year for XLY, returning 42.74% on an annual basis. The poorest year for XLY in the last ten years was 2018, with a yield of 1.66%. Most years the Consumer Discretionary Select Sector SPDR Fund has given investors modest returns, such as in 2015, 2017, and 2012, when gains were 9.93%, 22.77%, and 23.6% respectively.

Portfolio Growth

LQD vs. XLY - Portfolio Growth

Fund Initial Balance Final Balance CAGR
LQD $10,000 $19,776 6.58%
XLY $10,000 $63,066 18.86%

A $10,000 investment in LQD would have resulted in a final balance of $19,776. This is a profit of $9,776 over 11 years and amounts to a compound annual growth rate (CAGR) of 6.58%.

With a $10,000 investment in XLY, the end total would have been $63,066. This equates to a $53,066 profit over 11 years and a compound annual growth rate (CAGR) of 18.86%.

LQD’s CAGR is 12.28 percentage points lower than that of XLY and as a result, would have yielded $43,290 less on a $10,000 investment. Thus, LQD performed worse than XLY by 12.28% annually.


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