U.S. economic growth was revised up from the previous estimate. The biggest gain in three years in consumer spending drove the expansion (read: ETFs to Buy as Trade War Fears Abate).
Into the Headlines
GDP increased 2.9% in the last quarter of 2017 compared with the previously reported 2.5%, per the Commerce Department. Although it surpassed the 2.7% reading expected by a Reuters poll, it marked a slight decline from 3.2% reported in the previous quarter.
Consumer spending, which accounts for more than two-thirds of U.S. GDP, grew at its fastest pace in three years, increasing 4% in the final quarter of 2017 compared with 2.2% expansion in the previous quarter. However, imports were a drag, as it grew at an upwardly revised rate of 14.1% compared with the previously reported 14.0%, the fastest pace since the third quarter of 2010.
There are signs that GDP slowed further in Q1 2018, as investors take cues from retail sales data. Retail sales declined 0.1% in February against expectations of a gain of 0.3% after a 0.1% drop in the prior month and December. This was the first time since April 2012 that retail sales declined for three consecutive months (read: US Retail Sales Fall for 3 Straight Months: ETFs in Focus).
Despite the weakness in retail sales, some analysts bet on economic growth reaching Trump’s 3% target in 2018 on the $1.5 trillion tax reform and increase in government spending. Government spending increased 3% in the quarter compared with previously reported 2.9%, the highest since the second quarter of 2015.
What’s the Fed Going to Do?
The Federal Reserve hiked interest rates by 25 basis points in Powell’s first meeting as chairman. The new benchmark funds rate was increased to a target of 1.5% to 1.75%. Although the Fed kept its forecast of two more hikes in 2018, it is too early to comment on what turn the U.S. economy might take in the rest of the calendar year.
“Tax cuts and stronger government spending will boost average GDP growth to 2.9 percent in 2018,” per a Reuters article citing Gregory Daco, chief U.S. economist at Oxford Economics. “We forecast this environment will lead the Fed to raise interest rates four times this year,” he added.
Let us now discuss a few ETFs poised to benefit from the recent strength in economic fundamentals.
Consumer Discretionary Select Sector SPDR Fund (XLY - Free Report)
This fund seeks to provide exposure to consumer discretionary stocks and tracks the Consumer Discretionary Select Sector Index. Strength in consumer spending is expected to drive stocks in this sector higher. It has AUM of $13.0 billion and charges a low fee of 13 basis points a year.
The fund’s top three holdings are Amazon.com Inc (AMZN - Free Report) , Home Depot Inc (HD - Free Report) and Comcast Corp (CMCSA - Free Report) with 20.5%, 7.3% and 5.5% allocation, respectively. The fund has returned 16.1% in a year. XLY has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook.
Industrial Select Sector SPDR Fund (XLI - Free Report)
This fund focuses on providing exposure to the U.S. industrial sector. It has AUM of $12.5 billion and charges a fee of 13 basis points a year. The fund’s top three holdings are Boeing Co (BA - Free Report) , 3M Co (MMM - Free Report) and General Electric Co (GE - Free Report) with 7.8%, 5.7% and 5.3% allocation, respectively. The fund has returned 14.8% in a year. XLI has a Zacks ETF Rank #1 with a Medium risk outlook.
Financial Select Sector SPDR Fund (XLF - Free Report)
This fund seeks to provide exposure to financial stocks in the U.S. equity markets. Strength in the jobs market and rising rate expectations are expected to drive these stocks higher. It has AUM of $30.7 billion and charges a low fee of 13 basis points a year.
The fund’s top three holdings are Berkshire Hathaway Inc Class B BRKB, JPMorgan Chase & Co (JPM - Free Report) and Bank of America Corp (BAC - Free Report) with 11.6%, 11.3% and 8.6% allocation, respectively. The fund has returned 16.3% in a year. XLF has a Zacks ETF Rank #1 with a Medium risk outlook.
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