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ETFs That May Suffer as US Consumer Confidence Takes a Hit

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U.S. consumer confidence slipped marginally in December  as consumers are wary about the near-term outlook for financial and job prospects. However, analysts believe that the key confidence measure is at a decent level.

In this regard, Lynn Franco, director of economic indicators of the Conference Board, said that, "while the economy hasn't shown signs of further weakening, there is little to suggest that growth, and in particular consumer spending, will gain momentum in early 2020” (read: Top-Ranked ETFs, Stocks From Top Sector of the Last Decade).

A Sneak Peek Into the Numbers

For December 2019, the Conference Board's measure of consumer confidence index stands at 126.5, below the upwardly revised reading of 126.8 in November (from 125.5 originally). However, December’s reading missed the consensus estimate of 128.2, per a Reuters’ poll.

The Present Situation Index, which gauges consumer views on current market conditions, climbed from 166.6 to 170.0. 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, dropped from 100.3 in November to 97.4  in December.

The latest data shows the percentage of consumers assessing that business conditions are “good” remained virtually unchanged at 38.7%. Meanwhile, those judging the conditions were “bad” declined to 11.1% from 13.6%. Interestingly, the percentage of people claiming jobs were “plentiful” and the percentage of those stating jobs were “hard to get,” both marginally rose to 47% and 13.1%, respectively. However, there was a rise in the percentage of consumers expecting lesser jobs and lower income.

Looking Forward

The signing of the Sino-U.S. phase-one trade deal on Jan 15, 2019 might help improve consumer confidence. Per a Mastercard Spending Pulse survey, holiday sales increased 3.4% year over year. Moreover, there was an 18.8% year-over-year rise in online sales, highlighting the change in consumer’s shopping pattern. The survey tracked sales from Nov 1 through Dec 24.

Therefore, given Fed’s lower interest rate and improving domestic economy along with improving Sino-U.S. trade ties, there are chances that consumer confidence will improve over time.

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 closer 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

This is the largest and most popular product in the consumer discretionary space, with AUM of $14.51 billion and average daily volume of around 3.3 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 29.3% of assets, followed by specialty retail (24.8%), and hotels restaurants & leisure (20.8%). The fund charges 13 bps in fees per year and has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook (read: 10 Top-Performing ETFs of the Past Decade).

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 28.6%, 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 61,000 shares a day. The product has managed about $3.14 billion in its asset base and carries a Zacks ETF Rank #2 with a Medium risk outlook (read: ETFs to Tap on Amazon's Record Holiday Sales).

Fidelity MSCI Consumer Discretionary Index ETF FDIS

This fund tracks the MSCI USA IMI Consumer Discretionary Index, holding 284 stocks in its basket. The product has amassed $798.8 million in its asset base, while trading in good volumes of around 75,000 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. FXD has AUM of $338.9 million and trades in volume of 71,000 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: What Soft Confidence? 3 ETFs & Stocks for Solid Holiday Buying).

Invesco S&P 500 Equal Weight Consumer Discretionary ETF (RCD - Free Report)

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 65 securities in the basket. The product has amassed $106.1 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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