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ETFs to Invest as Consumers Shift to Economical Shopping
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In today's ever-changing economic landscape, a significant shift in consumer behavior has been observed. Consumers are now opting for cheaper or lower-cost alternatives over premium or more expensive products, mainly due to high inflation and higher rates.
At first glance, this trend may seem to bode ill for the economy. However, upon a closer look, it becomes apparent that this shift can offer some intriguing investment opportunities.
The reasons consumers are trading down are manifold, with some of the key factors being:
Economic Environment: The most apparent reason is the economic uncertainty arising from global issues such as the pandemic-ridden cash crunch, geopolitical tensions, and trade wars. These factors have made consumers more cautious about their spending, leading them to seek out value-for-money alternatives.
Rising Inflation: High inflation has become a global concern. With the cost of living steadily on the rise, consumers are becoming increasingly price-conscious. This scenario has given a boost to lower-priced products and brands that offer similar quality and functionality at a fraction of the cost.
Higher Interest Rates: Higher interest rates have become an issue for the past year. The Fed has hiked rates since March 2022 to a range of 5% - 5.25%. The latest rate hike, worth 25 bps, was enacted in May 2023, marking the 10th increase and bringing borrowing costs to their highest level since September 2007. Such a jump in rates has also weighed on consumers' purchasing power.
Regional Banking Crisis: The U.S. economy faced a severe regional banking crisis this year, resulting in the failure of three banks. Beginning in March, issues emerged in the regional banking sector, partly due to poor management. Market experts attribute some blame to the Fed's fast transition from ultra-loose to ultra-tight monetary policies. As a result, cautious lending practices since March may be impacting consumers negatively.
Technological Advancements: With the advent of online shopping and price comparison tools, consumers now have the power to compare prices across a multitude of platforms before making a purchase decision. This has led to increased price sensitivity and a propensity to choose cheaper alternatives.
Against this backdrop, below we highlight a few ETF areas that could gain from this consumer behavior.
ETFs to Gain
Discount Retailers: Discount retailers, dollar stores, and big-box stores that offer value-for-money products are likely to benefit from this trend. Companies like Walmart and Dollar General have seen a surge in their customer base as they offer quality products at competitive prices.
Consumer Staples: As consumers trade down, they are more likely to stick to essential items. This trend can be favorable for consumer staple stocks as these companies produce goods that people use daily, like food, beverages, and household items. Consumer Staples Select Sector SPDR Fund (XLP - Free Report) is a great bet here.
E-Commerce Platforms: As mentioned earlier, the rise of online shopping has played a significant role in encouraging consumers to trade down. E-commerce platforms that allow for easy price comparison and offer affordable options can be a good investment choice. Online Retail ETF (ONLN - Free Report) can be followed in this category.
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ETFs to Invest as Consumers Shift to Economical Shopping
In today's ever-changing economic landscape, a significant shift in consumer behavior has been observed. Consumers are now opting for cheaper or lower-cost alternatives over premium or more expensive products, mainly due to high inflation and higher rates.
At first glance, this trend may seem to bode ill for the economy. However, upon a closer look, it becomes apparent that this shift can offer some intriguing investment opportunities.
The reasons consumers are trading down are manifold, with some of the key factors being:
Economic Environment: The most apparent reason is the economic uncertainty arising from global issues such as the pandemic-ridden cash crunch, geopolitical tensions, and trade wars. These factors have made consumers more cautious about their spending, leading them to seek out value-for-money alternatives.
Rising Inflation: High inflation has become a global concern. With the cost of living steadily on the rise, consumers are becoming increasingly price-conscious. This scenario has given a boost to lower-priced products and brands that offer similar quality and functionality at a fraction of the cost.
Higher Interest Rates: Higher interest rates have become an issue for the past year. The Fed has hiked rates since March 2022 to a range of 5% - 5.25%. The latest rate hike, worth 25 bps, was enacted in May 2023, marking the 10th increase and bringing borrowing costs to their highest level since September 2007. Such a jump in rates has also weighed on consumers' purchasing power.
Regional Banking Crisis: The U.S. economy faced a severe regional banking crisis this year, resulting in the failure of three banks. Beginning in March, issues emerged in the regional banking sector, partly due to poor management. Market experts attribute some blame to the Fed's fast transition from ultra-loose to ultra-tight monetary policies. As a result, cautious lending practices since March may be impacting consumers negatively.
Technological Advancements: With the advent of online shopping and price comparison tools, consumers now have the power to compare prices across a multitude of platforms before making a purchase decision. This has led to increased price sensitivity and a propensity to choose cheaper alternatives.
Against this backdrop, below we highlight a few ETF areas that could gain from this consumer behavior.
ETFs to Gain
Discount Retailers: Discount retailers, dollar stores, and big-box stores that offer value-for-money products are likely to benefit from this trend. Companies like Walmart and Dollar General have seen a surge in their customer base as they offer quality products at competitive prices.
VanEck Retail ETF (RTH - Free Report) and iShares U.S. Consumer Focused ETF (IEDI - Free Report) house a lot of discount retailers like TJX Companies (TJX - Free Report) , Ross Stores (ROST - Free Report) and Target (TGT - Free Report) .
Consumer Staples: As consumers trade down, they are more likely to stick to essential items. This trend can be favorable for consumer staple stocks as these companies produce goods that people use daily, like food, beverages, and household items. Consumer Staples Select Sector SPDR Fund (XLP - Free Report) is a great bet here.
E-Commerce Platforms: As mentioned earlier, the rise of online shopping has played a significant role in encouraging consumers to trade down. E-commerce platforms that allow for easy price comparison and offer affordable options can be a good investment choice. Online Retail ETF (ONLN - Free Report) can be followed in this category.