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ETFs to Suffer as US Consumer Confidence Falls in August

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U.S. consumers seem worried about the sustainability of economic recovery from the pandemic-led slump, surging delta variant threat and increasing inflation levels. Consequently, the consumer confidence in the United States slipped to a six-month low in August. The Conference Board's measure of consumer confidence index stands at 113.8 (the lowest level since February), comparing unfavorably with July’s reading of 125.1. August’s reading also missed the consensus estimate of the metric declining to 124, per a Reuters’ poll. 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, declined to 147.3 in August (the lowest level since April). The Expectations Index, which is a measure of consumers’ short-term (for the next six months) outlook for income, business and labor market conditions, also dropped to 91.4 (a seven-month low reading).

Moreover, the survey’s labor market differential, calculated from data on respondents’ views on whether sufficient jobs are available or difficult to get, dropped to a reading of 42.8 in August from 44.1 in July (the highest level since 2000), per a Reuters article.

In this regard, Lynn Franco, Senior Director of Economic Indicators at The Conference Board, reportedly said, “Concerns about the Delta variant -- and, to a lesser degree, rising gas and food prices -- resulted in a less favorable view of current economic conditions and short-term growth prospects,” per a Reuters article.

Present U.S. Economic Scenario

The virus variant remains a serious concern as the number of cases is rising in the United States. The new cases arising from the delta variant are being mostly observed among the unvaccinated population. Going by Johns Hopkins University data, the United States is witnessing an average of 160,000 new COVID-19 cases a day, per a CNN report. Considering the current situation, Dr. Rochelle Walensky, the director of the US Centers for Disease Control and Prevention (CDC), has urged unvaccinated Americans to avoid travel during the Labor Day holiday weekend, according to a CNN report.

Going by CDC data, around 38.6% of the Americans (including 12 years old and older) are not yet fully vaccinated, as mentioned in a CNN report. The data also reflect 16 times higher hospitalization rate in the unvaccinated population than in the vaccinated.

The increasing concerns about the surging coronavirus cases due to the delta variant continue to dampen U.S. consumer sentiments. The metric surprisingly slid to a pandemic-era low level in early August when compared to a reading of 70.8 recorded in April 2020. The University of Michigan’s preliminary consumer sentiment index fell to 70.2 in August from 81.2 last month. The metric also lagged market’s forecast of 81.2. The reading was the lowest since December 2011 as Americans seem to be sceptical about things like personal finances, inflation and employment.

Meanwhile, Wall Street has impressed investors with an attractive rally in the three broader indices in August. The second-quarter earnings season saw better-than-expected results, stimulating the rally in stock markets. According to a CNBC article, the S&P 500 is on track to witness the largest increase since the fourth-quarter 2009 by posting an earnings growth rate of 95.4%.

Investors are also relieved about the Fed’s intention to not hike interest rates in the near term. Also, Fed Chairman Jerome Powell seems to have prepared the market for tapering its $120 billion in monthly bond purchases this year.

The FDA granting the first full U.S. approval to Pfizer (PFE)/BioNTech’s (BNTX) coronavirus vaccine, Comirnaty (BNT162b), has also boosted investors’ confidence in some reopening bets like airlines, travel and leisure and casino players.

The full FDA approval is expected to increase the confidence for imposing vaccine mandates. Also, the unvaccinated population is now more likely to opt for vaccinations. According to a CNBC article, the Kaiser Family Foundation survey reflected that three in 10 unvaccinated adults were more likely to get jabbed if one of the vaccines received full approval. The market participants are also upbeat about the chances of peaking delta variant cases.

ETFs That Might Suffer

The fall in consumer sentiment is likely to hurt the consumer discretionary sector, which attracts a major portion of consumer spending amid rising inflation levels. Here we have highlighted the four most popular funds 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 $19.78 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: Chip Shortages: ETF Winners and Losers).

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 $6.67 billion in its asset base and carries a Zacks ETF Rank #2, with a Medium-risk outlook.

First Trust Consumer Discretionary AlphaDEX Fund (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 $2.01 billion. It charges 63 bps in annual fees and has a Zacks ETF Rank #3 (Hold), 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 $1.64 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: ETFs to Rise on Full FDA Approval for Pfizer COVID-19 Vaccine).

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