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PCE Inflation Less Than Expected: 5 Low P/E Growth ETF Picks
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Key Takeaways
Softer PCE inflation reduces pressure for an immediate Fed rate hike.
Fading rate-hike worries could boost growth ETFs.
Five growth ETF picks trade at lower P/E multiples than the S&P 500.
U.S. inflation came in softer than expected in August, offering some relief to investors worried about another Federal Reserve rate hike.
The Commerce Department reported that the personal consumption expenditures (PCE) price index rose 0.3% in August, putting annual inflation at 3.4%. Economists had expected a 0.3% monthly increase and a 3.7% annual gain.
Core PCE, which excludes food and energy and is closely watched for underlying inflation trends, rose 0.2% for the month and 3% from a year ago. Both readings were below expectations of 0.3% and 3.3%, respectively, per CNBC.
Inflation during the second quarter was also revised slightly lower, with headline PCE at 5% and core PCE at 3.3%.
Fed Gets Some Breathing Room
The cooler inflation data boosted stock futures and pushed Treasury yields lower as traders reduced bets on an October rate hike. Markets now see December as the more likely window for another increase.
Still, inflation remains well above the Fed's 2% target. Energy prices were a major contributor in August, with gasoline prices rising 4.4% and energy goods and services increasing 2.3%.
Economy Shows More Strength
A separate Commerce Department report showed that the U.S. economy grew at a 2.2% annualized pace in the second quarter, well above the previous 1.5% estimate. Consumer and government spending, along with investment, provided a bigger boost than previously estimated.
Meanwhile, personal income rose 0.2% in August, while spending jumped 0.9%, suggesting that households continue to support economic activity despite moderately elevated prices.
For investors, the takeaway is fairly simple: inflation is still too high for comfort, but the latest data give the Fed more room to wait before tightening policy again.
Low P/E Growth ETFs to Buy
Growth ETFs tend to benefit from lower interest rates because cheaper borrowing costs can support corporate investment and expansion. Lower rates also increase the present value of companies’ future earnings, which can support higher valuations, particularly for growth stocks.
However, with stocks rallying this year and resulting in slightly elevated P/E multiples, lower-P/E companies may be good picks now. These can provide exposure to earnings growth without paying as much for each dollar of earnings.
If earnings remain resilient, relatively lower valuations can also provide some cushion against multiple compression if interest-rate expectations change. The S&P 500 currently trades at 26.15X. Hence, we describe five growth ETFs below that have a lower P/E than the S&P 500.
The underlying S&P 500 Growth at a Reasonable Price Index is composed of securities with strong growth characteristics selected from the Russell Top 200 Index. The $2-billion fund charges 36 bps in fees and currently sports a Zacks Rank #1 (Strong Buy).
First Trust Small Cap Growth AlphaDEX ETF (FYC - Free Report) – 15.86X
The underlying NASDAQ AlphaDEX Small Cap Growth Index is an enhanced which employs the AlphaDEX stock selection methodology to select stocks from the NASDAQ US 700 Small Cap Growth Index. The fund charges 70 bps in fees. The fund has a Zacks Rank #3 (Hold).
The Nomura Focused Large Growth ETF is an actively managed exchange-traded fund that invests in a concentrated portfolio of large-capitalization US growth companies, seeking long-term capital growth. The $290-million fund charges 44 bps in fees.
State Street SPDR S&P 400 Mid Cap Growth ETF (MDYG - Free Report) – P/E: 21.22X
The underlying S&P MidCap 400 Growth Index measures the performance of the mid-capitalization growth sector in the U.S. equity market. The Zacks Rank #2 (Buy) ETF charges 15 bps in fees.
First Trust Mid Cap Growth AlphaDEX ETF (FNY - Free Report) – P/E: 24.80X
The underlying NASDAQ AlphaDEX Mid Cap Growth Index is an enhanced which employs the AlphaDEX stock selection methodology to select stocks from the NASDAQ US 600 Mid Cap Growth Index. The fund charges 73 bps in fees. The fund has a Zacks Rank #3.
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PCE Inflation Less Than Expected: 5 Low P/E Growth ETF Picks
Key Takeaways
U.S. inflation came in softer than expected in August, offering some relief to investors worried about another Federal Reserve rate hike.
The Commerce Department reported that the personal consumption expenditures (PCE) price index rose 0.3% in August, putting annual inflation at 3.4%. Economists had expected a 0.3% monthly increase and a 3.7% annual gain.
Core PCE, which excludes food and energy and is closely watched for underlying inflation trends, rose 0.2% for the month and 3% from a year ago. Both readings were below expectations of 0.3% and 3.3%, respectively, per CNBC.
Inflation during the second quarter was also revised slightly lower, with headline PCE at 5% and core PCE at 3.3%.
Fed Gets Some Breathing Room
The cooler inflation data boosted stock futures and pushed Treasury yields lower as traders reduced bets on an October rate hike. Markets now see December as the more likely window for another increase.
Still, inflation remains well above the Fed's 2% target. Energy prices were a major contributor in August, with gasoline prices rising 4.4% and energy goods and services increasing 2.3%.
Economy Shows More Strength
A separate Commerce Department report showed that the U.S. economy grew at a 2.2% annualized pace in the second quarter, well above the previous 1.5% estimate. Consumer and government spending, along with investment, provided a bigger boost than previously estimated.
Meanwhile, personal income rose 0.2% in August, while spending jumped 0.9%, suggesting that households continue to support economic activity despite moderately elevated prices.
For investors, the takeaway is fairly simple: inflation is still too high for comfort, but the latest data give the Fed more room to wait before tightening policy again.
Low P/E Growth ETFs to Buy
Growth ETFs tend to benefit from lower interest rates because cheaper borrowing costs can support corporate investment and expansion. Lower rates also increase the present value of companies’ future earnings, which can support higher valuations, particularly for growth stocks.
However, with stocks rallying this year and resulting in slightly elevated P/E multiples, lower-P/E companies may be good picks now. These can provide exposure to earnings growth without paying as much for each dollar of earnings.
If earnings remain resilient, relatively lower valuations can also provide some cushion against multiple compression if interest-rate expectations change. The S&P 500 currently trades at 26.15X. Hence, we describe five growth ETFs below that have a lower P/E than the S&P 500.
ETF Picks
Invesco S&P 500 GARP ETF (SPGP - Free Report) – P/E: 15.10X
The underlying S&P 500 Growth at a Reasonable Price Index is composed of securities with strong growth characteristics selected from the Russell Top 200 Index. The $2-billion fund charges 36 bps in fees and currently sports a Zacks Rank #1 (Strong Buy).
First Trust Small Cap Growth AlphaDEX ETF (FYC - Free Report) – 15.86X
The underlying NASDAQ AlphaDEX Small Cap Growth Index is an enhanced which employs the AlphaDEX stock selection methodology to select stocks from the NASDAQ US 700 Small Cap Growth Index. The fund charges 70 bps in fees. The fund has a Zacks Rank #3 (Hold).
Nomura Focused Large Growth ETF (LRGG - Free Report) – P/E: 20.90X
The Nomura Focused Large Growth ETF is an actively managed exchange-traded fund that invests in a concentrated portfolio of large-capitalization US growth companies, seeking long-term capital growth. The $290-million fund charges 44 bps in fees.
State Street SPDR S&P 400 Mid Cap Growth ETF (MDYG - Free Report) – P/E: 21.22X
The underlying S&P MidCap 400 Growth Index measures the performance of the mid-capitalization growth sector in the U.S. equity market. The Zacks Rank #2 (Buy) ETF charges 15 bps in fees.
First Trust Mid Cap Growth AlphaDEX ETF (FNY - Free Report) – P/E: 24.80X
The underlying NASDAQ AlphaDEX Mid Cap Growth Index is an enhanced which employs the AlphaDEX stock selection methodology to select stocks from the NASDAQ US 600 Mid Cap Growth Index. The fund charges 73 bps in fees. The fund has a Zacks Rank #3.