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ETFs to Buy or Avoid After Strong Q2 GDP

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After a winter slowdown, the spring season revived the economy driving up consumer and business spending. This is especially true given that U.S. GDP growth expanded 2.6% annually in the second quarter, double the first quarter growth of 1.2%, and represents the fastest growth since the third quarter of last year when the economy grew 2.8%.

This 96-month growth confirms the eight-year expansion since mid-2009 – the third-longest economic winning streak in American history behind March 1991 to March 2001 (120 months) and February 1961 to December 1969 (106 months).

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased 2.8% in the second quarter, up from 1.9% in the first quarter. A strong job market and rise in household finances boosted by increasing home prices and equity gains led to the wealth effect and in turn more spending power. Meanwhile, business spending on equipment grew for the third consecutive quarter at 8.2% — the fastest growth in almost two years. This shows that companies are optimistic about demand in the U.S. as well as overseas (read: 4 ETFs to Ride on 16-Year High Consumer Confidence).

Additionally, modest inventory reductions, which were the big drag on first-quarter growth, added to the strength. Given the solid rebound, the U.S. economy grew 1.9% in the first half and has come closer to the Fed’s 2.2% growth target for this year. However, Trump’s 3% growth target seems unlikely given sluggish wage growth and the absence of implementation in his pro-growth policies as expected.

Given this, we have highlighted a few ETFs that could benefit or drop following strong Q2 GDP numbers:

ETFs to Win

PowerShares DB US Dollar Bullish Fund UUP

Despite muted inflation, a healthy economy is expected to pull in more capital into the country and lead to appreciation of the U.S. dollar. UUP is the prime beneficiary of the rising dollar as it offers exposure against a basket of six world currencies. This is done by tracking the Deutsche Bank Long US Dollar Index Futures Index Excess Return plus the interest income from the fund’s holdings of U.S. Treasury securities. In terms of holdings, UUP allocates nearly 57.6% in euro and 25.5% collectively in Japanese yen and British pound. The fund has so far managed an asset base of $514.3 million while sees an average daily volume of around 1.2 million shares. It charges 80 bps in annual fees and has shed 8.6% since the start of the year. The fund has a Zacks ETF Rank of 3 or ‘Hold’ rating with a Medium risk outlook (read: Euro at 2-Year High: ETF Winners & Losers).

Consumer Discretionary Select Sector SPDR Fund XLY

Increased spending will 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 the ultra-popular XLY, which has AUM of $12.8 billion and average daily volume of over 4.1 million shares. It tracks the Consumer Discretionary Select Sector Index and holds 85 securities with higher concentration on the top firm at 15.5%. Other firms make up for a nice mix with each holding less than 7.2% of assets. The fund charges 14 bps in fees per year and has gained nearly 13% in the year-to-date time frame. It has a Zacks ETF Rank of 3 or ‘Hold’ rating with a Medium risk outlook.

First Trust Industrials/Producer Durables AlphaDEX Fund FXR

A rise in business spending will fuel growth in the industrial sector and thus FXR looks intriguing. This fund follows the StrataQuant Industrials Index, which uses the AlphaDEX methodology to select stocks from the Russell 1000 Index and ranks them on both growth and value factors. The approach results in a basket of 93 securities, which are widely spread across components with none holding more than 2% of assets. In terms of industrial exposure, machinery takes the top spot with 21.6% share followed by 14.8% in aerospace & defense, and 13.5% in airlines. The fund has accumulated nearly $1.5 billion in AUM and sees a good trading volume of about 244,000 shares a day. It charges 66 bps in fees per year and has gained 8.1% so far this year. FXR has a Zacks ETF Rank of 2 with a Medium risk outlook.

ETFs to Lose


Upbeat GDP dampened the appeal for gold as it boosted investors’ risk-on sentiment and paved the way for further Fed rate hikes this year. As a result, the yellow metal would see sluggish trading in the days ahead and products tracking this bullion like GLD will lose. The fund tracks the price of gold bullion measured in U.S. dollars, and kept in London under the custody of HSBC Bank USA. It is the ultra-popular gold ETF with AUM of $32.3 billion and average daily volume of around 7.6 million shares a day. Expense ratio comes in at 0.40%. The fund has gained 10.1% since the start of the year and has a Zacks ETF Rank of 3 with a Medium risk outlook (read: Gold Surges on Weak U.S. Inflation: ETFs in Focus).

iShares 20+ Year Treasury Bond ETF (TLT - Free Report)

U.S. government bonds would be badly hit as strong growth has led to speculation that the economy can withstand a tighter monetary policy. This would lead to higher Treasury yields and lower bond prices. In particular, bonds and ETFs tracking the long end of the yield curve would be impacted the most. The ultra-popular long-term Treasury ETF – TLT – tracks ICE U.S. Treasury 20+ Year Bond Index and has AUM of $7.3 billion. Holding 33 securities in its basket, the fund focuses on the top credit rating bonds with average maturity of 26.12 years and effective duration of 17.43 years. The ETF trades in average daily volume of more than 8.3 million shares and charges 15 bps in fees per year. It has added 5.3% so far this year and has a Zacks ETF Rank of 4 or ‘Sell’ rating with a High risk outlook (read: Treasury ETFs Rally on Falling Inflation Expectation).

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