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Shoppers on a Splurge: Buy 3 Consumer Discretionary Mutual Funds

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Consumer outlays climbed at the fastest pace in almost seven years in April as households stepped up purchases of an array of goods and services. An uptick in retail, auto and home sales in April also makes us believe that consumers are in a financially healthy shape. Spending was supported by steady income levels. April’s outlays followed healthy consumer expenditure levels in the first quarter.

Given these encouraging trends, it is expected that consumer spending levels will improve further in the coming months. A measure of U.S. consumer sentiment already touched its highest level in May in 11 months. As Americans are more inclined to splurge this summer, investing in funds from the consumer discretionary sector may prove to be profitable. Notably, a major part of consumer spending goes to this sector.

Consumer Spending Hits 7-Year High in April

U.S. consumer spending increased 1% in April from a month earlier, its biggest one-month jump since Aug 2009, according to the Commerce Department. Rise in personal spending that measures how much Americans paid for a range of goods and services is the latest sign that economic growth is strengthening after a sluggish start to the year.

Personal consumption had advanced 0.2% in February, while in March it remained flat. When adjusted for inflation, spending rose a bit less but still at a healthy 0.6% in April. This turned out to be the biggest gain since Feb 2014. Consumer spending was lifted by a 2.3% jump in purchase of long-lasting manufacturing goods. Purchase of non-durable goods and spending on services too increased 1.4% and 0.6%, respectively.

Broad-based Spending

Sales at retailers jumped 1.3% in April from a month earlier, the biggest gain since Mar 2015, according to the Commerce Department. This leap in retail sales was led by gains among auto dealers, gas stations and online merchants.

Car sales spiked in April. U.S. light-vehicle sales increased 3.5% year over year to 1.51 million units in Apr 2016. April sales pulled up SAAR to 17.42 million units from 16.56 million units in Mar 2016 and 16.77 million units in Apr 2015.

When it comes to housing, sales of new single-family homes rose by 16.6% from March to 619,000 in April, its highest level since Jan 2008, according to the U.S. Department of Housing and Urban Development. Existing homes sales also gained 1.7% last month to 5.45 million, according to National Association of Realtors. Pending home sales too climbed to its highest level in April in over a decade.

Rise in Income Level, Wage Growth

Consumers were able to spend more in April because of a steady rise in income and higher wage growth. According to the Commerce Department, personal income rose 0.4% in April, in line with March’s gain. More income generally translates into more expenditure.

Wages grew significantly in April. Average hourly earnings ticked up 8 cents in April following a 6 cent increase the month before. Additionally, with the unemployment rate at 5%, there is no immediate reason to worry about a slack in the job market.

Consumption Expenditure Healthy in Q1

 April was not just a flash in the pan; personal consumption expenditures had increased in the first quarter and were primarily responsible for boosting the GDP. According to the “second” estimate by the Bureau of Economic Analysis, the first quarter output of goods and services increased at an annual rate of 0.8%. First-quarter GDP data was revised upward from the previously estimated 0.5% rise.

Real personal consumption expenditure, which accounts for almost two-thirds of the U.S. economy, increased 1.9% in the first quarter. Americans had spent more on housing, with outlays on new home construction soaring 17.1% in the first quarter, its biggest gain in almost four years.

Top 3 Consumer Discretionary Mutual Funds to Invest In

Given this healthy pattern of consumer spending, it is expected that mutual funds linked to the consumer discretionary or cyclical sector will stand to gain. More money in consumers’ pockets will eventually spur spending on discretionary items. Buoyed by higher incomes, Americans are also turning optimistic about the economy. The Thomson Reuters/University of Michigan’s final consumer sentiment reading for May came in at 94.7, the highest in almost a year.

The consumer discretionary sector includes companies that sell nonessential goods and services. This sector includes companies involved in retail, automobiles, media, consumer services, consumer durables and leisure products. Here we have selected three such consumer discretionary or cyclical funds that boast a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy), have positive 3-year and 5-year annualized returns, have minimum initial investment within $5000 and carry a low expense ratio.

Funds have been selected over stocks, since funds reduce transaction costs for investors and also diversify their portfolio without the numerous commission charges that stocks need to bear.

Putnam Global Consumer Y (PGCYX - Free Report) invests the majority of its assets in securities of companies in the consumer discretionary products and services industries. PGCYX’s 3-year and 5-year annualized returns are 9.9% and 10.6%, respectively. Annual expense ratio of 1.01% is lower than the category average of 1.2%. This fund has a Zacks Mutual Fund Rank #2.

Fidelity Select Retailing Portfolio (FSRPX - Free Report) invests a major portion of its assets in securities of firms involved in merchandising finished goods and services to consumers. FSRPX’s 3-year and 5-year annualized returns are 17.8% and 18.9%, respectively. Annual expense ratio of 0.8% is lower than the category average of 1.41%. This fund has a Zacks Mutual Fund Rank #1.

Fidelity Select Leisure (FDLSX - Free Report) invests a large portion of its assets in securities of companies engaged in the design, production, or distribution of goods or services in the leisure industries. FDLSX’s 3-year and 5-year annualized returns are 10.2% and 12.1%, respectively. Annual expense ratio of 0.78% is lower than the category average of 1.41%. This fund has a Zacks Mutual Fund Rank #2.

About Zacks Mutual Fund Rank

By applying the Zacks Rank to mutual funds, investors can find funds that not only outpaced the market in the past but are also expected to outperform going forward. Pick the best mutual funds with the help of Zacks Rank.

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