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5 ETFs to Tap the Four-Decade Strongest U.S. Economy

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Despite the growth deceleration in the third-quarter, the American economy boomed last year on wider spread of vaccinations and easing stay-at-home restrictions. This is especially true as GDP grew 6.9% in the fourth quarter, following a 2.3% advancement in the third quarter. With this, the U.S. economy expanded 5.7% annually in 2021, marking the fastest pace of growth since 1984 and a sharp reversal from the GDP contraction of 3.4% recorded in 2020.

That said, most of the ETFs will likely benefit on solid 2021 GDP numbers. ETFs like Consumer Discretionary Select Sector SPDR Fund (XLY - Free Report) , iShares U.S. Transportation ETF (IYT - Free Report) , Materials Select Sector SPDR (XLB - Free Report) , SPDR S&P Regional Banking ETF (KRE - Free Report) and iShares Core S&P Small-Cap ETF (IJR - Free Report) with a solid Zacks ETF Rank #1 (Strong Buy) or 2 (Buy) are expected to outperform this year.

Current Trends

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 3.3% in the fourth quarter after a 2% increase in the third quarter. The boost came from higher spending on dine out, cars, shopping in the crucial holiday season, traveling and other activities. Additionally, the economy generated a record 6.4 million jobs last year compared to 9.4 million jobs lost in 2021. Private investment surged 9.5% last year.

However, the pace of strong momentum has slowed in recent weeks given inflationary pressures, resurgence in COVID-19 cases and supply chain disruptions with most analysts expecting the slowdown to continue this year. Inflation soared last year at the fastest pace in nearly four decades (read: 5 Popular ETF Investment Themes to Consider in 2022).

Meanwhile, Fed Chair Jerome Powell, in the latest FOMC meeting, stated that "the economy no longer needs sustained high levels of monetary policy support," and that "it will soon be appropriate to raise rates.” The increase in interest rates will make borrowing expensive, driving up the costs of buying a new car or house, or carrying credit card debt, and thus slow the economic growth.

As the government scales back stimulus spending and the Federal Reserve raises interest rates, the International Monetary Fund predicts that economic growth will slow to 4% in 2022 while the World Bank expects the U.S. economy to grow by 3.7% this year.

ETFs to Tap

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

Solid economic growth will have a positive impact on the consumer discretionary sector, which attracts a major portion of consumer spending. As such, investors could tap the encouraging trend in the basket form through the ultra-popular Consumer Discretionary Select Sector SPDR Fund. It has AUM of $20.2 billion and an average daily volume of about 9.5 million shares (read: Will Will ETFs Suffer as US Consumer Confidence Weakens in January).

Consumer Discretionary Select Sector SPDR Fund offers exposure to the broad consumer discretionary space by tracking the Consumer Discretionary Select Sector Index. Holding 61 securities in its basket, XLY charges 12 bps in annual fees and has a Zacks ETF Rank #2 with a Medium risk outlook.

iShares U.S. Transportation ETF (IYT - Free Report)

Travel will continue to rebound with more Americans getting vaccinated, business and economies reopening, and consumer confidence growing. iShares U.S. Transportation ETF tracks the S&P Transportation Select Industry FMC Capped Index, giving investors exposure to a small basket of 50 securities. Within the transportation sector, railroads, and air freight and logistics take the top two spots with 32.8% and 30% share, respectively, while trucking (20.8%) and airlines (14.9%) round off the next two.

iShares U.S. Transportation ETF has $1.7 billion in AUM and has a good trading volume of around 9.5 million shares a day. It charges 41 bps in fees per year and has a Zacks ETF Rank #2 with a High risk outlook.

Materials Select Sector SPDR (XLB - Free Report)

A tight policy means solid economic growth, which in turn results in higher demand for materials. Materials Select Sector SPDR is the most-popular material ETF that follows the Materials Select Sector Index. It manages about $7.9 billion in its asset base and trades in volumes as heavy as around 7.3 million shares. Materials Select Sector SPDR holds about 28 securities in its basket and charges 12 bps in fees per year from its investors.

In terms of industrial exposure, chemicals dominates the portfolio with 69% share, while metals & mining and containers & packaging round off the top three positions. The product has a Zacks ETF Rank #1 with a Medium risk outlook (read: 3 Sector ETFs to Win Amid Rising Rates).

SPDR S&P Regional Banking ETF (KRE - Free Report)

A rising-rate environment and improving economy is highly beneficial for the financial sector, especially banks. As banks seek to borrow money at short-term rates and lend at long-term rates, the rise in interest rates will earn more on lending and pay less on deposits, leading to a wider spread. This will expand net margins and increase banks’ profits. SPDR S&P Regional Banking ETF provides exposure to the regional banks segment by tracking the S&P Regional Banks Select Industry Index. It holds 140 stocks in its basket with each accounting for no more than 2.1% of the assets.

SPDR S&P Regional Banking ETF has AUM of $5.7 billion and charges 35 bps in annual fees. It trades in an average daily volume of 11 million shares. SPDR S&P Regional Banking ETF has a Zacks ETF Rank #2 with a High risk outlook.

iShares Core S&P Small-Cap ETF (IJR - Free Report)

Small caps, which are generally more cyclical stocks, tend to outperform when the economy is healthy and growing. Consumer confidence is stronger than expected, hiring has been picking up and wages are rising. Additionally, rising rates will boost U.S. dollar and favor small-cap stocks, which are more domestically exposed. iShares Core S&P Small-Cap ETF offers exposure to U.S. small-cap stocks and follows the S&P SmallCap 600 Index.

iShares Core S&P Small-Cap ETF holds 677 stocks in its basket with key holdings in financials, industrials, information technology, consumer discretionary and healthcare that account for a double-digit exposure each. iShares Core S&P Small-Cap ETF has AUM of $70.6 billion and trades in an average daily volume of 4.7 million shares. The product charges investors 6 bps in annual fees and has a Zacks ETF Rank #2 with a Medium risk outlook.