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Buy Discretionary ETFs on Improving Consumer Sentiment

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Americans have become slightly optimistic about the economy as consumer sentiment has risen from an all-time low. Rising consumer confidence bodes well for household spending in the coming months and is expected to 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 consumer discretionary ETFs like Consumer Discretionary Select Sector SPDR Fund (XLY - Free Report) , Vanguard Consumer Discretionary ETF (VCR - Free Report) , Fidelity MSCI Consumer Discretionary Index ETF (FDIS - Free Report) , Invesco S&P SmallCap Consumer Discretionary ETF (PSCD - Free Report) and SPDR S&P Retail ETF (XRT - Free Report) . These funds have a Zacks ETF Rank #1 (Strong Buy) or 2 (Buy), suggesting their outperformance in the months ahead.

After falling to their lowest points in more than a decade, the University of Michigan’s Consumer Sentiment index edged up 51.1 in July from 50.0 in June. Retail sales rebounded strongly by 1% in June, indicating that Americans spend more last month amid soaring inflation, which could allay fears of an imminent recession (read: Yield Curve Inverts Most Since 2000: Defensive ETFs in Focus).

Further, consumer long-term inflation expectations declined in early July amid a sharp drop in gasoline prices. The University of Michigan's preliminary survey showed that consumers see inflation running at 2.8% over a five-year horizon, the lowest in a year and down from 3.1% in June.

The combination of good news might soothe Fed’s aggressive tightening as last week’s inflation data bolstered the case for a historic 100 bps rate hike in this month’s meeting. The consumer price index soared 9.1% year over year in June, a level not seen in more than four decades  and was up from an 8.6% jump in May (read: 5 ETFs to Ride High Amid Red-Hot Inflation).

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

Consumer Discretionary Select Sector SPDR Fund offers exposure to the broad consumer discretionary space and tracks the Consumer Discretionary Select Sector Index. It holds 58 securities in its basket with key holdings in Internet & direct marketing retail, specialty retail, automobiles, and hotels, restaurants and leisure round off the next three spots with a double-digit allocation each.

Consumer Discretionary Select Sector SPDR Fund is the largest and most popular product in this space, with AUM of $13.8 billion and an average daily volume of around 8 million shares. It charges 0.10% in expense ratio and has a Zacks ETF Rank #1 with a Medium risk outlook.

Vanguard Consumer Discretionary ETF (VCR - Free Report)

Vanguard Consumer Discretionary ETF follows the MSCI U.S. Investable Market Consumer Discretionary 25/50 Index and holds 313 stocks in its basket. In terms of industrial exposure, Internet & direct marketing retail, automobile manufacturers and restaurants occupy the top spots with double-digit exposure each.

Vanguard Consumer Discretionary ETF is the low-cost choice in the space, charging investors only 10 bps in annual fees while volume is good at nearly 200,000 shares a day. The fund has managed $4.3 billion in its asset base so far. Vanguard Consumer Discretionary ETF has a Zacks ETF Rank #1 with a Medium risk outlook.

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

Fidelity MSCI Consumer Discretionary Index ETF tracks the MSCI USA IMI Consumer Discretionary Index, holding 333 stocks in its basket. Internet & direct marketing retail makes up for the top sector, with a 25% share, followed by specialty retail (19.7%) and hotels restaurants & leisure (17.8%).

Fidelity MSCI Consumer Discretionary Index ETF has amassed $1 billion in its asset base while trading in a good volume of around 152,000 shares a day on average. It charges 8 bps in annual fees from investors and has a Zacks ETF Rank #1 with a Medium risk outlook.

Invesco S&P SmallCap Consumer Discretionary ETF (PSCD - Free Report)

Invesco S&P SmallCap Consumer Discretionary ETF targets the small-cap segment of the broad consumer discretionary space by tracking the S&P SmallCap 600 Capped Consumer Discretionary Index. It holds 91 securities in its basket, with specialty retail taking the largest share at 33.2%, while household durables, and hotels, restaurants and leisure account for a double-digit exposure each (read: 5 Solid ETF Strategies for Second Half).

Invesco S&P SmallCap Consumer Discretionary ETF has attracted $26.3 million in AUM and charges 29 bps in annual fees. It trades in an average daily volume of 4,000 shares and has a Zacks ETF Rank #2 with a High risk outlook.

SPDR S&P Retail ETF (XRT - Free Report)

SPDR S&P Retail ETF tracks the S&P Retail Select Industry Index, which provides exposure across large, mid-and small-cap retail stocks. It holds well-diversified 100 stocks in its basket. SPDR S&P Retail ETF is well spread across various industries with a double-digit allocation each in apparel retail, automotive retail, Internet & direct marketing retail, and specialty stores.

SPDR S&P Retail ETF is the largest and most popular in the retail space, with AUM of $379.8 million and an average trading volume of 6.6 million shares. It charges 35 bps in annual fees and has a Zacks ETF Rank #2 with a Medium risk outlook.