Americans are gaining optimism as consumer confidence rose for the second consecutive month in August. 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 (read: Consumer Confidence Jumps: ETFs to Add).

According to Wells Fargo, consumers had accumulated as much as $2.1 trillion in excess savings during the peak of the pandemic helped by fiscal support and lack of spending options amid lockdowns. That’s a huge sum in an economy with $25 trillion in annual GDP. Though these savings are rapidly declining amid high inflation, consumers still have $1.3 trillion in extra spending power as of August, as quoted on Yahoo Finance.

“Excess savings currently total around 14% of a year’s spending, with almost all saved in bank accounts and other liquid assets,” Joseph Briggs, an economist for Goldman Sachs, observed in a research note published lately, as quoted on tker.co.

Ironically, these excess savings may be fueling inflation, which the Federal Reserve is trying to tame by raising rates. If consumers can afford to pay higher prices, then businesses will not slash prices too, which in turn will keep inflation high.

Hence, one can bet on consumer-discretionary stocks now as the late October-December period embraces the key holiday season, which puts the spotlight on the performance of retailers. As loads of sales-boosting events — Halloween, Thanksgiving, Cyber Monday, Black Friday and Christmas — fall in this quartile, the sector generally sees a sales boost.

Mastercard SpendingPulse says U.S. retail sales are expected to rise non-inflation adjusted 7.1% year over year (up 8.5% versus 2021) for the holiday season, excluding autos and gas. As a result, the consumer discretionary sector has every chance to outperform in Q4.  

And e-commerce is expected to increase 4.2%. In-store retail sales are expected to be up 7.9%. While e-commerce has seen substantial growth in recent years, in-store spending accounted for more than 4/5^th of retail sales from January through August 2022.

Low levels of unemployment coupled with sustained monthly job creation and rising wages might encourage consumers to spend more during the holiday season. However, inflationary pressure is a concern. Consumers will look for deals. Holiday shopping will likely get started earlier this year, i.e, around October.

Against this backdrop, below we highlight a few consumer-discretionary ETFs that carry a Zacks Rank #1 (Strong Buy) or #2 (Buy).

ETFs in Focus

Vanguard Consumer Discretionary ETF (VCR Quick QuoteVCR - Free Report) – Zacks Rank #1

The underlying MSCI US Investable Market Consumer Discretionary 25/50 Index is designed to transition in and out of securities affected by pending updates to the consumer discretionary sector. The fund charges 10 bps in fees.

Fidelity MSCI Consumer Discretionary ETF (FDIS Quick QuoteFDIS - Free Report) – Zacks Rank #1

The underlying MSCI USA IMI Consumer Discretionary Index represents the performance of the consumer discretionary sector in the U.S. equity market. The fund charges 8 bps in fees.

Consumer Discretionary Select Sector ETF (XLY Quick QuoteXLY - Free Report) – Zacks Rank #1

The underlying Consumer Discretionary Select Sector Index seeks to provide an effective representation of the consumer discretionary sector of the S&P 500 Index. The fund charges 10 bps in fees.

SPDR S&P Retail ETF (XRT Quick QuoteXRT - Free Report) – Zacks Rank #2

The underlying S&P Retail Select Industry Index represents the retail sub-industry portion of the S&P TMI. The S&P TMI tracks all the U.S. common stocks listed on the NYSE, AMEX, NASDAQ National Market and NASDAQ Small Cap exchanges. The Retail Index is a modified equal weight index. The fund charges 35 bps in fees.