The U.S. economy has been on a solid growth path since spring. This is especially true given that U.S. GDP growth expanded 3% annually in the third quarter following 3.1% growth in the second quarter. This represents the best back-to-back quarters of at least 3% growth since 2014.
The growth was driven by increase in consumer spending, inventory investment and business investment amid two devastating hurricanes Harvey and Irma that dampened activities across Houston area in late August and Florida in early September.
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased 2.4% in the third quarter thanks to solid auto sales boosted by surging demand to replace vehicles damaged by the hurricances. A strong job market, cheap fuel and low household debt are leading to the wealth effect and in turn more spending power. Meanwhile, business spending on equipment increased 8.3%. This shows that companies are optimistic about demand in the United States as well as overseas.
The solid trend is likely to continue with many experts projecting growth of 3% in the fourth quarter as well due to the ongoing hurricane-related rebound, unemployment at a low rate of 4.2%, and hopes of Congress passing Trump’s tax reform proposal by the end of the year (read: ETFs to Benefit from Trump Tax Plan).
Moreover, consumers have become highly optimistic about the economy. This is especially true as consumer sentiment soared to the highest level since the start of 2004. The consumer sentiment index, as indicated by University of Michigan survey, hit 100.7 in October, up from 95.1 in September. This is the second time when the index crossed the 100 mark since the record 1990s expansion following the 103.8 rise in January 2004. Rising consumer sentiment will no doubt increase spending power and is thus expected to have a positive impact on the overall economic growth picture.
While most of the ETFs will likely to benefit following strong Q3 GDP and consumer sentiment, we have highlighted the five funds that are expected to outperform in the days ahead and have a solid Zacks ETF Rank of #1 (Strong Buy), 2 (Buy) or 3 (Hold).
iShares Russell 2000 Growth ETF (IWO - Free Report)
Small-cap stocks are the biggest beneficiaries of improving American economic health as these are closely tied to the U.S. economy and generate most of their revenues from the domestic market. Honing in on the growth ones within this market cap would be the winning bet as the small cap growth stocks outperform during a trending market (a market characterized by a prolonged uptrend). As such, IWO offering exposure to a broad basket of 1,162 stocks whose earnings are expected to grow at an above-average rate relative to the market looks excellent choice. It is one of the popular and liquid ETFs in the small-cap space with AUM of $8.8 billion and average trading volume of 494,000 shares a day. The fund charges 24 bps in annual fees from investors and has a Zacks ETF Rank #2 (read: Small Cap ETFs & Stocks Crushing Russell 2000).
PowerShares DB US Dollar Bullish Fund (UUP - Free Report)
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. The fund 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 $624.8 million while sees an average daily volume of around 1.1 million shares. It charges 80 bps in annual fees and has a Zacks ETF Rank #3.
Vanguard Consumer Discretionary ETF (VCR - Free Report)
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 popular VCR, which has AUM of $2.2 billion and average daily volume of about 62,000 shares. It holds a broad basket of 371 securities and charges 10 bps in fees per year. It has a Zacks ETF Rank #2.
iShares U.S. Home Construction ETF (ITB - Free Report)
Higher spending coupled with solid job growth and increased wages will boost demand for homes, leading to strong home construction market. ITB provides a pure play to home construction stocks and holds 47 stocks in its basket. The product has amassed $2.1 billion in its asset base and trades in heavy volume of around 2.6 million shares a day on average. It charges 44 bps in annual fees and has a Zacks ETF Rank #2 (read: 3 ETFs to Buy as New Home Sales Surge).
First Trust Industrials/Producer Durables AlphaDEX Fund (FXR - Free Report)
A rise in business spending will fuel growth in the industrial sector and thus FXR looks intriguing. This fund 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. The fund has accumulated nearly $1.6 billion in AUM and sees a good trading volume of about 14344,000 shares a day. It charges 66 bps in fees per year and has a Zacks ETF Rank #2 (read: 5 Solid Reasons to Buy Industrial ETFs Now).
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