Recently released economic data indicated that U.S. consumers are once again confident of spending money after a dismal first quarter. Caution in consumer expenditure which contributes around 75% to U.S. GDP was mainly behind the sloth in the first quarter. However, the prevailing low interest rate environment and favorable job-market conditions encouraged domestic consumers to spend amid sluggish global growth.
Consumer discretionary, which attracts most of the spending, is poised to gain from this favorable environment. Hence, top-ranked ETFs from this sector may prove to be prudent investment propositions (read:
Forget Brexit, Celebrate July Fourth with These ETFs). Major Boosters: Low Interest & Favorable Job Market
Concerns including sluggish global growth and Brexit resisted the Fed from hiking the key interest rate this year, which in turn had a positive impact on consumer spending. Meanwhile, the Fed’s decision to stick to its 2016 rate path also appears to be on shaky ground with just six of the 17 policymakers forecasting one rate hike this year, compared to only one Fed official having a similar view in March. This indicates that the low-interest rate environment might prevail for the next few months (read:
Red-Hot Income ETFs Post Fed Meet).
Separately, after adding only 11,000 jobs in May, the labor market showed a remarkable rebound last month. The U.S. Department of Labor reported that the economy saw a healthy volume of 287,000 jobs additions in June, significantly surpassing the consensus estimate of 177,000. Moreover, the rejoining of 400,000 American led the unemployment rate to rise to 4.9% from 4.7% in May. Also, after a six-cent increase in May, average hourly earnings gained a couple of cents last month to $25.61.
Rise in Consumer Credit & Spending
The Federal Reserve reported that consumer credit increased $18.6 billion in May, well above analysts’ expectation of $16 billion. It rose at an annual rate of 6.2%, higher than April’s increase of 4.5%. While revolving credit rose 3% last month, non-revolving credit increased at an annual rate of 7.3%. Both categories witnessed higher rates of growth than April. This indicated that despite a slower pace of jobs’ growth in May, a low interest rate environment continued to encourage consumers to take loans (read:
Retail Sales in Fine Fettle: ETFs to Watch).
Moreover, the Commerce Department reported that consumer spending rose 0.4% in May from April, preceded by a 1.1% rise in April, which was the highest gain in around seven years. Further, the Conference Board reported that Consumer Confidence Index advanced to 98 in June from 92.4 in May. The reading also exceeded the consensus estimate of 93.1. The Present Situation Index increased from 113.2 to 118.3, while the Expectations Index rose from 78.5 to 84.5 in June.
4 Top-Ranked ETFs to Buy
In this encouraging scenario, the consumer discretionary sector is poised to benefit from rising consumer confidence and spending, and improving economic conditions. Hence we have highlighted four ETFs from this sector that carry a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook. Also, these ETFs have gained significantly over the past three-month period.
Vanguard Consumer Discretionary ETF VCR
This fund follows the MSCI U.S. Investable Market Consumer Discretionary 25/50 Index and holds 391 stocks in its basket with the top firm taking the maximum share at 9.9%. Other firms hold no more than 5.7% of assets. Internet retail, restaurants and, movies and entertainment are the top three sectors accounting for a double-digit exposure each. VCR is the low choice in the space, charging just 10 bps in annual fees while volume is also impressive at nearly 117,000 shares a day. The product has managed about $1.8 billion in its asset base so far and has gained 3.3% over the past three months.
First Trust Cnsmr Discret AlphaDEX ETF FXD
This follows the performance of StrataQuant Consumer Discretionary Index. This has a basket of 122 stocks that are well spread out across components, with each holding less than 1.5% of assets. Specialty retail is the top sector with more than one-fourth of the portfolio, closely followed by household durables (12.3%) and media (11.5%). FXD has AUM of more than $1.7 billion and trades in solid volume of 564,000 shares per day on average. It charges a higher 63 bps in annual fees and has returned 2% over the past three months (read:
Forget Retail, Focus on Broad Consumer ETFs). iShares US Consumer Services IYC
This ETF provides targeted exposure to the domestic consumer services stocks by tracking the Dow Jones U.S. Consumer Services Index. Holding 189 stocks in its basket, the fund is slightly skewed toward the top firm at 9.9% while the other firms hold less than 5.7%. In terms of industrial exposure, retailing makes up the largest share with 37.7%, followed by media (22.5%), foods & staples retailing (15.6%), and consumer services (15.4%). The fund has amassed $879.5 million in its asset base while trades in a moderate volume of 55,000 shares a day on average. It charges 43 bps in annual fees from investors and gained 3.2% over the past three months.
VanEck Vectors Retail ETF ( RTH Quick Quote RTH - Free Report)
This fund follows the performance of MVIS US Listed Retail 25 Index. It has a basket of 26 stocks and has an allocation of more than 63% in the top 10 holdings. Specialty retail is the top sector with more than one-fourth of the portfolio, closely followed by Internet & catalog retail (19%) and hypermarkets (12%). RTH has AUM of $130.8 million and trades in moderate volume of 41,000 shares per day on average. It charges a higher 35 bps in annual fees and returned nearly 5.3% over the past three months.
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