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ETFs at Risk as U.S. Consumer Sentiment Sees a Steep Decline

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The latest preliminary report on April’s U.S. consumer sentiment shows that the metric has seen a record decline, largely due to the coronavirus-led rising unemployment and shut down of economic activities. The University of Michigan’s preliminary sentiment index slipped to 71 in early April (lowest since 2011) and also compared unfavorably with the median projection of 75 (per a Bloomberg survey). The measure of current conditions declined steeply to 72.4, while a gauge of expectations slid 9.7 points to 70.

Coronavirus & the U.S. Economy

The United States has reported more than 557,000 confirmed cases, leaving behind China and Italy. The death toll due to the pandemic in the world’s largest economy has risen to 22,000. To combat the outbreak, President Trump extended the federal government’s guidelines for social distancing until Apr 30.

The rapid spread of the virus is leading to sweeping travel bans, and cancellation of large events as well as shutting down of schools, colleges, universities, restaurants and bars, and shopping malls. In such a scenario, a slowdown in global economic growth looks inevitable. The job market is also expected to be severely hit as Americans are increasingly filing claims for unemployment benefits. The United States has already witnessed 16.8 million applications for jobless benefits in the past three weeks largely due to the shut-down of non-essential businesses as well as social-distancing measures. With increased unemployment levels, the spending capacity of consumers will, undoubtedly, be compromised to a greater extent (read: 6 Healthy ETFs Amid Coronavirus-Hit Economy).

In such a scenario, JPMorgan has trimmed its U.S. GDP estimates for the first half of 2020. It expects the U.S. economy to have shrunk 10% in first-quarter 2020 in comparison to the 4% contraction estimated previously.

Also according to Richard Curtin, chief economist for the Surveys of Consumers, “consumers need to be prepared for a longer and deeper recession rather than the now discredited message that pent-up demand will spark a quick and robust economic recovery.”

ETFs That Might Suffer

The outbreak is expected to have an impact on the consumer discretionary sector, which attracts a major portion of consumer spending. Below, we have highlighted the five most popular ones that target the broader consumer discretionary 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 an AUM of $10.77 billion. It tracks the Consumer Discretionary Select Sector Index, holding 63 securities in its basket. The fund charges 13 basis points (bps) in fees per year and carries a Zacks ETF Rank #2 (Buy), with a Medium-risk outlook (read: Is Coronavirus a Boon for Online Retail ETFs?).

Vanguard Consumer Discretionary ETF (VCR - Free Report)

This fund currently follows the MSCI US Investable Market Consumer Discretionary 25/50 Index and holds 296 stocks in its basket. VCR charges investors 10 bps in annual fees. The product has managed $2.35 billion in its asset base and carries a Zacks ETF Rank #2, with a Medium-risk outlook (read: Stimulus Hopes Triumph Over Virus: 5 Top ETF Picks for March).

Fidelity MSCI Consumer Discretionary Index ETF (FDIS - Free Report)

This fund tracks the MSCI USA IMI Consumer Discretionary Index, holding 284 stocks in its basket. The product has amassed $577.9 million in its asset base. It charges 8 bps in annual fees from investors and carries a Zacks ETF Rank #3 (Hold), with a Medium-risk outlook.

First Trust Consumer Discretionary AlphaDEX Fund (FXD - Free Report)

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 124 stocks. FXD has an AUM of $159.6 million. It charges 64 bps in annual fees and has a Zacks ETF Rank #3, with a Medium-risk outlook.

Invesco S&P 500 Equal Weight Consumer Discretionary ETF 

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 63 securities in the basket. The product has amassed $45.3 million in its asset base and charges 40 bps in annual fees. It carries a Zacks ETF Rank #3, with a Medium-risk outlook.

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