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Will ETFs Rally as US Consumer Confidence Improves in February?

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Consumer confidence in the United States has improved again in February. The introduction of another round of stimulus and the beginning of the inoculation process might have instilled optimism among consumers. The Conference Board's measure of consumer confidence index stands at 91.3, comparing favorably with January’s reading of 88.9. Moreover, February’s reading slightly beat the consensus estimate of 90, per a Reuters’ poll. However, the metric continues to be below the pre-pandemic level of 132.6 in February 2020.

The Present Situation Index, which gauges consumer views on current business and labor market conditions, rose to 92 this month from 85.5 in January. Meanwhile, the Expectations Index, which is a measure of consumers’ short-term (for the next six months) outlook for income, business and labor market conditions, slid to 90.8 in February from 91.2 last month.

Moreover, the survey’s labor market differential, calculated from data on respondents’ views on whether sufficient jobs are available or difficult to get, rose to a reading of 0.7 in February from (2.5) in January, per a Reuters article. Meanwhile, uncertainty surrounding the coronavirus pandemic with concerns looming around the new variants may put keep a check on consumer spending, in the near term at least.

In this regard, Lynn Franco, Senior Director of Economic Indicators at The Conference Board, reportedly said, “after three months of consecutive declines in the Present Situation Index, consumers’ assessment of current conditions improved in February. This course reversal suggests economic growth has not slowed further. While the Expectations Index fell marginally in February, consumers remain cautiously optimistic, on the whole, about the outlook for the coming months. Notably, vacation intentions—particularly, plans to travel outside the U.S. and via air—saw an uptick this month, and are poised to improve further as vaccination efforts expand.”

Present U.S. Economy Scenario

U.S. retail sales jumped a solid 5.3% in January on a month-over-month basis to hit a seven-month high, the Commerce Department informed on Feb 17. In fact, retail sales dipped 1% in December despite the holiday season registering record sales last year. Excluding autos, sales rose 5.9%, beating analysts’ estimates of a meager 1% rise.

The U.S. housing sector largely supported the economy by mostly staying resilient to the coronavirus outbreak amid a low-interest rate environment. Per the monthly National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI), builder sentiment for newly-built single-family homes came in at 84 in February in comparison to 83 points in January, 86 in December, 90 in November and 30 in April (the lowest since June 2012). The metric also surpassed economists’ median forecast of 83, per a Bloomberg poll.

It is also believed that wider coronavirus vaccine rollouts are making a strong case in favor of faster U.S. economic recovery in 2021. Biden is expected to increase the distribution of coronavirus vaccines by rolling out more funds to local and state officials, expanding the number of vaccination sites and introducing a national education campaign, per a CNBC article. Moreover, positive developments with regard to discussions on providing an additional stimulus are raising hopes of faster U.S. economic recovery.

Moreover, FDA staff recently endorsed Johnson & Johnson’s (JNJ - Free Report) single-shot coronavirus vaccine for emergency use, which can result in an Emergency Use Authorization real soon, per a CNBC article.

Meanwhile, the Fed in its commitment to drive economic recovery has decided to keep interest rates at a near-zero level. The central bank will also continue with the asset purchase program at the current rate until “substantial further progress” is made to reach a state of healthy inflation and maximum employment levels.

ETFs That Might Gain

The moderate improvement in consumer confidence is likely to boost the consumer discretionary sector, which attracts a major portion of consumer spending. Below, we have highlighted the four most popular ones that target the broader consumer discretionary sector (see all Consumer Discretionary ETFs):

The Consumer Discretionary Select Sector SPDR Fund (XLY - Free Report)

This is the largest and most popular product in the consumer discretionary space, with AUM of $19.29 billion. It tracks the Consumer Discretionary Select Sector Index. The fund charges 12 basis points (bps) in fees per year and carries a Zacks ETF Rank #2 (Buy), with a Medium-risk outlook (read: Take a Look at These 5 ETFs to Ride the Market Bulls).

Vanguard Consumer Discretionary ETF (VCR - Free Report)

This fund currently follows the MSCI US Investable Market Consumer Discretionary 25/50 Index. VCR charges investors 10 bps in annual fees. The product has managed $5.35 billion in its asset base and carries a Zacks ETF Rank #2, with a Medium-risk outlook (read: 5 ETFs to Buy on Amazon's Blockbuster Q4 Earnings).

First Trust Consumer Discretionary AlphaDEX ETF (FXD - Free Report)

This fund tracks the StrataQuant Consumer Discretionary Index, which employs the AlphaDEX stock-selection methodology to select stocks from the Russell 1000 Index. FXD has AUM of $1.57 billion. It charges 63 bps in annual fees and has a Zacks ETF Rank #2, with a Medium-risk outlook.

Fidelity MSCI Consumer Discretionary Index ETF (FDIS - Free Report)

This fund tracks the MSCI USA IMI Consumer Discretionary Index. The product has amassed $1.42 billion in its asset base. It charges 8 bps in annual fees from investors and carries a Zacks ETF Rank #2, with a Medium-risk outlook (read: Cyclical ETFs to Gain Amid the Bullish Market Scenario).

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