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Will ETFs Suffer as US Consumer Confidence Dips in May?

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The U.S. consumers are clearly feeling the heat of persistently high inflation levels and the Federal Reserve’s hawkish stance on interest rate hike. Consequently, the Conference Board's measure of consumer confidence index slipped to 106.4 in May 2022 from an upwardly revised reading of 108.6 in April. The metric continues to be below the pre-pandemic level of 132.6 achieved in February 2020 but is definitely above its pandemic lows.

The Present Situation Index, which gauges consumer views on current business and labor market conditions, declined to 149.6 in May from 152.9 last month. The Expectations Index, which measures consumers’ short-term (for the next six months) outlook for income, business and labor market conditions, slipped to 77.5 from 79.

The disappointing consumer confidence reading might affect the consumer discretionary sector, which attracts a major portion of consumer spending amid the rising inflation levels. Certain ETFs that can feel the impact are The Consumer Discretionary Select Sector SPDR Fund (XLY - Free Report) , Vanguard Consumer Discretionary ETF (VCR - Free Report) , First Trust Consumer Discretionary AlphaDEX Fund (FXD - Free Report) and Fidelity MSCI Consumer Discretionary Index ETF (FDIS - Free Report) .

Commenting on the data, Lynn Franco, senior director of Economic Indicators at The Conference Board, reportedly said, “Consumer confidence dipped slightly in May, after rising modestly in April. The decline in the Present Situation Index was driven solely by a perceived softening in labor market conditions. By contrast, views of current business conditions — which tend to move ahead of trends in jobs — improved. Overall, the Present Situation Index remains strong, suggesting that growth did not contract further in Q2. With the Expectations Index weakening further, consumers also do not foresee the economy picking up steam in the months ahead. They do expect labor market conditions to remain relatively strong, which should continue to support confidence in the short run.”

Lynn Franco also believes that the rising interest levels are adding to the consumers' concerns and hurting their purchase plans. The purchasing intentions for big-ticket items like cars, homes and major appliances are being hit by the rising price levels. The American households are also postponing their vacation plans amid the inflationary environment. He believes that the expectations of rising prices and further rate hikes might keep consumers on edge and curb their spending.

Moreover, the disappointing preliminary consumer sentiment readings for early May say the same story. 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 for the index coming in at 64, per a Reuters’ poll.

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 - 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 $16.06 billion. XLY tracks the Consumer Discretionary Select Sector Index.

The Consumer Discretionary Select Sector SPDR Fund charges an expense ratio of 0.10%. XLY carries a Zacks ETF Rank #1 (Strong Buy), with a Medium-risk outlook. Also, XLY trades in a three-month average volume of 10.5 million shares (read: Why Fear High Inflation? Play Cyclical ETFs).

Vanguard Consumer Discretionary ETF (VCR - 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 $4.71 billion and charges an expense ratio of 0.10%. VCR carries a Zacks ETF Rank #1, with a Medium-risk outlook. Also, Vanguard Consumer Discretionary ETF trades in a three-month average volume of about 172,000 shares.

First Trust Consumer Discretionary AlphaDEX Fund (FXD - 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 $472.4 million. FXD charges 0.61% of annual fees and has a Zacks ETF Rank #3 (Hold), with a Medium-risk outlook. Also, FXD trades in a three-month average volume of about 546,000 shares.

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

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

Fidelity MSCI Consumer Discretionary Index ETF amassed $1.16 billion in its asset base. FDIS charges 8 basis points as annual fees from investors and carries a Zacks ETF Rank #1, with a Medium-risk outlook. FDIS trades in a three-month average volume of about 156,000 shares.

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