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Can Consumer Discretionary ETFs Make Good Bets for Q4?

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Wall Street is seeing some strength amid September’s dull performance so far. The easing of China’s property market-related tensions and the absence of any hint on an immediate move to taper the bond purchasing program and keeping the benchmark interest rates unchanged have been supporting the market rally.

Investors are still on the edge with concerns over the rising inflationary levels, possibilities of a tax hike and spike in coronavirus cases. Amid the current market environment, investors looking to rake in some good returns can consider the consumer discretionary sector.

The U.S. consumer sentiment marginally improved despite the rising concerns about the surging coronavirus cases and the rising inflationary levels. The University of Michigan’s preliminary consumer sentiment inched up to 71 in September from 70.3 last month, per a BloombergQuint article.

The strength in consumer sentiment can be the major driving force behind the solid performance by the consumer discretionary space as consumers are expected to splurge this holiday season after being restricted for more than a year.

The latest retail sales data has surprised investors pleasantly. The metric inched up 0.7% sequentially in August 2021 against market expectations of a 0.8% decline, per a CNBC article. Online retail sales rose 5.3% last month after dropping 4.6% in July, per the Reuters article. There was an increase in clothing sales as well as that of building material and furniture in the previous month.

According to Mastercard SpendingPulse,  U.S. retail sales — excluding automotive and gas — for the “75 Days of Christmas” spanning from Oct 11 to Dec 24 are anticipated to increase 6.8% from the year-earlier tally.

The progress in coronavirus vaccine rollout is presenting a strong case in favor of a faster return to normalcy and economic recovery. The FDA has approved emergency use of a booster dose of the Pfizer Inc. (PFE) and BioNTech SE (BNTX) COVID-19 vaccine. President Joe Biden has also outlined a very effective plan to accelerate the vaccination rate and control the coronavirus outbreak. He has made it mandatory for federal employees to get the COVID-19 vaccination, per a CNBC article. The Biden government will also issue guidelines to the Labor Department for imposing vaccine mandates for employers with more than 100 employees or run weekly tests.

The United States will likely relax travel restrictions for international visitors who are vaccinated against COVID-19 in November, including those from the U.K. and EU, the White House said recently, per a CNBC article. Foreigners visiting the United States will have to present a vaccination proof and a negative COVID-19 test taken within three days of departure.  The latest White House announcement came post the peak summer travel season, which signals at strong holiday travel demand.

Notably, a number of restaurants and retailers that have resumed business after restrictions were relaxed in the United States should see some accelerated demand and footfall. Also, the leisure and entertainment space should see a rebound as casinos and amusement parks have started welcoming visitors.

ETFs to Consider

Along with the other favorable factors as mentioned above, the moderate improvement in consumer sentiment is likely to boost the consumer discretionary sector. 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 $20.08 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: Will ETFs Gain as US Consumer Sentiment Improves in September?).

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 $6.54 billion in its asset base and carries a Zacks ETF Rank #1 (Strong Buy), with a Medium-risk outlook (read: ETF Areas to Gain From the Upcoming Holiday Shopping Season).

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 $1.97 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 $1.60 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.

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