The latest disappointing preliminary consumer sentiment readings for early May are bearing the brunt of persistently high inflation levels. The University of Michigan’s preliminary consumer sentiment declined 9.4% from the prior-month level to 59.1 in early May (the lowest reading since August 2011). The metric lagged the market forecast of the index coming in at 64, per a Reuters’ poll.

The disappointing consumer sentiment reading might hurt the consumer discretionary sector, which attracts a major portion of consumer spending amid the rising inflation levels. Certain ETFs that can see the gains are The Consumer Discretionary Select Sector SPDR Fund (XLY Quick QuoteXLY - Free Report) , Vanguard Consumer Discretionary ETF (VCR Quick QuoteVCR - Free Report) , First Trust Consumer Discretionary AlphaDEX Fund (FXD Quick QuoteFXD - Free Report) and Fidelity MSCI Consumer Discretionary Index ETF (FDIS Quick QuoteFDIS - Free Report) .

The measure of current economic conditions declined 8.4% to 63.6 in May. The Expectations Index witnessed a 9.9% fall in the year-ahead economic outlook to 56.3. One-year inflation expectations remain at 5.4% for the third consecutive month (per a Reuters article). The survey's five-to-10-year inflation outlook stayed at 3% in May for the fourth straight month.

Consumers are upset about the buying conditions for durable manufactured goods, which they consider the worst since the survey began tracking the series in 1978, per a Reuters article.

The consumer spending levels are, however, expected to remain high, mainly owing to the huge amount of savings done during the pandemic. In this regard, Robert Frick, corporate economist with Navy Federal Credit Union, commented that "but consumer spending keeps rising, and with savings high, household debt low and the jobs market strong, that spending should continue until the economy falters," per a Reuters article.

The persistently steep inflation levels are also weighing on consumers’ confidence in the United States. The growing supply-chain disturbances emanating from the ongoing Russia-Ukraine war crisis and the resurging COVID-19 cases in China might trigger concerns over further rising inflation levels.

The Conference Board's measure of consumer confidence index stands at 107.3 in April 2022 compared with 107.6 in March. Moreover, April’s reading missed the consensus estimate of 108, per a Reuters survey of economists. Also, the metric continues to be below the pre-pandemic level of 132.6 achieved in February 2020.

The Russia-Ukraine crisis, inflation at a near 40-year high and the Fed’s hiked outlook for the interest rate remain concerns. As the Russia-Ukraine tension continues, rising commodity prices and fears of further disruptions in global supply-chain distributions might stoke higher inflation. Also, as the Federal Reserve took an aggressive approach to increase the rates, market participants are worried about the U.S. economy slipping into a stagflation due to high-interest rates and steep inflation.

ETFs to Keep Track of

Here we discuss in detail 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 Quick QuoteXLY - Free Report)

The Consumer Discretionary Select Sector SPDR Fund is the largest and the most popular product in the consumer discretionary space, with an AUM of $15.45 billion. XLY tracks the Consumer Discretionary Select Sector Index.

The Consumer Discretionary Select Sector SPDR Fund charges an expense ratio of 0.10%. XLY currently carries a Zacks ETF Rank #2 (Buy), with a Medium-risk outlook. Also, The Consumer Discretionary Select Sector SPDR Fund trades in a three-month average volume of 11.6 million shares (read: Don't Sell in May, Buy These Top-Ranked ETFs Instead).

Vanguard Consumer Discretionary ETF (VCR Quick QuoteVCR - Free Report)

Vanguard Consumer Discretionary ETF currently follows the MSCI US Investable Market Consumer Discretionary 25/50 Index.

Vanguard Consumer Discretionary ETF has an AUM of $4.44 billion and charges an expense ratio of 0.10%. VCR carries a Zacks ETF Rank #2, with a Medium-risk outlook. Also, Vanguard Consumer Discretionary ETF trades in a three-month average volume of about 169,000 shares (read: How Are ETFs Reacting to Starbucks' Q2 Earnings Results?).

First Trust Consumer Discretionary AlphaDEX Fund (FXD Quick QuoteFXD - Free Report)

First Trust Consumer Discretionary AlphaDEX Fund tracks the StrataQuant Consumer Discretionary Index, employing the AlphaDEX stock-selection methodology to select stocks from the Russell 1000 Index.

First Trust Consumer Discretionary AlphaDEX Fund has an AUM of $482.3 million. FXD charges 0.61% of annual fees and has a Zacks ETF Rank #3 (Hold), with a Medium-risk outlook. Also, First Trust Consumer Discretionary AlphaDEX Fund trades in a three-month average volume of about 570,000 shares.

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

Fidelity MSCI Consumer Discretionary Index ETF tracks the MSCI USA IMI Consumer Discretionary Index.

Fidelity MSCI Consumer Discretionary Index ETF amassed $1.14 billion in its asset base. FDIS charges 8 basis points as annual fees from investors and carries a Zacks ETF Rank #2, with a Medium-risk outlook. Fidelity MSCI Consumer Discretionary Index ETF trades in a three-month average volume of about 156,000 shares (read: Another Banner Quarter for Tesla: ETFs to Buy).