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US Economy Warms Up After Frigid Winter: 3 ETFs to Watch

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The U.S. economy shivered and shrank in the beginning of 2014 as a cold snap swept across country. The economy contracted 2.9% in the first quarter, according to the latest data from the Commerce Department, representing the sharpest decline since the last recession ended five years ago. This was worse than the previous estimate of 1% decline projected a month ago and the analyst estimates.
Higher-than-expected drop in healthcare spending, weak consumer spending, lower inventories and trade deficit snowballed into serious economic woes. This resulted in an alarming slowdown in growth and many analysts apprehended another recession. But it is not yet time to press the panic button as this seems like a temporary setback. This is especially true, as winter eroded about $15 billion from the economy, as per the market expectation.  

Additionally, latest indicators for the hiring, manufacturing and service sectors point to a strong economic growth for the ongoing second quarter. Activity has picked up in a warmer weather, auto sales are surging and the job market is strengthening with the addition of 200,000 jobs each month over the past four months. Stumbling housing growth has turned around as new home sales climbed to a six-year high last month while existing home sales rose to their highest level since October (read: Has Spring Finally Sprung for Housing ETFs?).

Further, the recent consumer sentiment survey has also been extremely positive with the latest reading surpassing expectations. The monthly Consumer Confidence Index, measured by the Conference Board, climbed to the highest level in six and half years to 85.2 in June from 82.2 in May.

Moreover, the Fed continued to scale back its monetary stimulus, suggesting that the economy is improving substantially. Global economy is also showing signs of improvement driven by encouraging manufacturing data from China and Japan despite instability in Iraq and growing tensions in Russia (read: 3 Cyclical ETFs to Buy in a Rebounding U.S. Economy).

Given that the economy seems back on track, investors may want to take a closer look to those U.S. equity ETFs which have returns largely driven by the development in the U.S. economy. Below, we have highlighted three large cap ETFs representing the major U.S. benchmarks and how they have performed in the light of weak growth:  

SPDR S&P 500 ((SPY - Free Report) )

The fund tracks the S&P 500 index, holding 503 stocks in its basket. It is widely spread across a number of securities as none holds more than 3.2% of total assets. Sector wise, the product is diversified with information technology, financials, healthcare, consumer discretionary, energy and industrials accounting for double-digit exposure.

SPY is the largest and most popular fund in the entire ETF universe with AUM of $166.4 billion and heavy average daily volume of more than 106 million shares. It is the low cost product, charging just 9 bps in annual fees and has added 6.9% in the year-to-date time frame. The fund has a Zacks ETF Rank of 2 or ‘Buy’ rating with ‘Medium’ risk outlook (read: Will Large Cap ETFs Continue to Surge?).

PowerShares QQQ ((QQQ - Free Report) )

This product provides exposure to 100 largest domestic and international companies excluding financial stocks by tracking the Nasdaq-100 Index. It is largely concentrated on the top three firms – Apple (AAPL), Microsoft (MSFT) and Google (GOOG) – which make up for a combined 29.3% of total assets. Further, nearly three-fifths of the portfolio is dominated by information technology while consumer discretionary and healthcare round off to the top three.

The fund has amassed $43.1 billion in its asset base and trades in average daily volume of $38.8 million shares. Expense ratio came in at 0.20%. The ETF has gained about 7% so far this year and has a Zacks ETF Rank of 3 or ‘Hold’ rating with ‘High’ risk outlook.

SPDR Dow Jones Industrial Average ETF ((DIA - Free Report) )

This ETF follows the Dow Jones Industrial Average and has been able to manage $11.6 billion in its asset base. Volume is solid as it exchanges 6.3 million shares a day on average. The fund charges 17 bps in annual fees per year from investors (see: all the Large Cap ETFs here).

Holding 31 stocks in its basket, the product is moderately concentrated on the top 10 holdings with largest allocation going to Visa (V), International Business Machines (IBM) and Goldman (GS). However, the fund is widely spread across number of sectors with industrials, information technology, financials, consumer discretionary and healthcare taking double-digit allocations. DIA is up 2.6% year-to-date and has a Zacks ETF Rank of 3 with ‘Medium’ risk outlook.

Bottom Line

Investors should note that these products have performed quite well despite the negative impact from weather and this trend will surely continue at least in the near term given the current bullish economic fundamentals.
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