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ETFs in Focus as US Consumer Confidence Drops in October

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U.S. consumer confidence has slipped to a four-month low as consumers are wary about the near-term outlook for business conditions and job prospects. However, analysts believe that the key confidence measure stands at a decent level.

In this regard, Lynn Franco, director of economic indicators of the Conference Board, said that, “confidence levels remain high and there are no indications that consumers will curtail their holiday spending” (read: Time to Flock to E-commerce ETFs Ahead of Holiday Season?)

A Sneak Peek Into the Numbers

For October 2019, the Conference Board's measure of consumer confidence index stands at 125.9, slightly below the revised reading of 126.3 in September (initially 125.1 reported). However, October’s reading missed the consensus estimate of 128.0, per a Reuters’ poll. Moreover, the current reading compares unfavorably with the 18-year high consumer confidence of 137.9 in the year-ago period.

The Present Situation Index, which gauges consumer views on current market conditions, climbed from 170.6 to 172.3. However, the Expectations Index, which is a measure of consumers’ short-term (for the next six months) outlook for income, business and labor market conditions, declined to 94.9 from 96.8 in September.

The latest data shows a fall in the number of respondents planning to buy large items like autos and appliances, whereas, there was a record rise in the population that was planning a vacation in the next six months. Notably, the share of respondents expecting better business environment in the future fell to the lowest level since March. It is believed that weakness in some sections of the economy like slower wage growth rate, weak manufacturing data and a disappointing pace of hiring are affecting consumer confidence.

Looking Forward

The 15-month long Sino-US trade war can be largely blamed for the low U.S. consumer confidence. However, progress in trade talks may improve business conditions (read: ETFs to Buy on Phase 1 of U.S.-China Trade Deal).

Meanwhile, on Oct 25, the University of Michigan, which conducts a similar study on U.S. consumer behavior, reported that consumer sentiment for October 2019 was 95.5 compared with 93.2 in the previous month. October’s reading was the highest in three months. Moreover, the Fed’s latest move to cut interest rate by a quarter point can improve consumer confidence.

ETFs in Focus

The combination of these factors is expected to have an impact on the consumer discretionary sector, which attracts a major portion of consumer spending. As such, investors should take a close look at consumer discretionary ETFs. Below, we have highlighted the five most popular ones that target the broader sector (see all Consumer Discretionary ETFs):

Consumer Discretionary Select Sector SPDR Fund (XLY - Free Report)

This is the largest and most popular product in the consumer discretionary space with AUM of $14.34 billion and average daily volume of around 3.8 million shares. It tracks the Consumer Discretionary Select Sector Index, holding 64 securities in its basket. From a sector look, Internet & direct marketing retail takes the top spot with 28.1% of assets, followed by specialty retail (26.3%), and hotels restaurants & leisure (20.4%). The fund charges 13 bps in fees per year and has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.

Vanguard Consumer Discretionary ETF VCR

This fund currently follows the MSCI US Investable Market Consumer Discretionary 25/50 Index and holds 298 stocks in its basket. Internet & Direct Marketing Retail takes the largest share at 27.2%, while restaurants and home improvement retail round off the next two spots. VCR charges investors 10 bps in annual fees, while volume is moderate at nearly 67,000 shares a day. The product has managed about $3.01 billion in its asset base and carries a Zacks ETF Rank #2 with a Medium risk outlook (read: Low Volatility ETFs for Turbulent Times).

Fidelity MSCI Consumer Discretionary Index ETF FDIS

This fund tracks the MSCI USA IMI Consumer Discretionary Index, holding 289 stocks in its basket. Internet & direct marketing retail makes up for the top sector with 27% share, followed by specialty retail (23%), and restaurants (12%). The product has amassed $724.3 million in its asset base while trading in good volumes of around 80,000 shares a day on average. It charges 8 bps in annual fees from investors and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

First Trust Consumer Discretionary AlphaDEX Fund FXD

This fund tracks the StrataQuant Consumer Discretionary Index, which employs the AlphaDEX stock selection methodology to select stocks from the Russell 1000 Index. This approach results in a basket of 119 stocks. Specialty retail is the top sector with 19% of the portfolio while apparel & luxury goods, hotels & leisure facilities and home builders round of the next three spots. FXD has AUM of $357.1 million and trades in volume of 82,000 shares per day on average. It charges 64 bps in annual fees and has a Zacks ETF Rank #2 with a Medium risk outlook (read: ETFs to Buy as Americans' Confidence Nears 19-Year High).

Invesco S&P 500 Equal Weight Consumer Discretionary ETF RCD

This ETF offers equal weight exposure to companies in the consumer discretionary sector by tracking the S&P 500 Equal Weight Consumer Discretionary Index. It holds 64 securities in the basket. The product has amassed $90.6 million in its asset base and charges 40 bps in annual fees. It has a Zacks ETF Rank #3 with a Medium risk outlook.

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