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Don't "Bet Against the American Economy:" ETF Areas to Win

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Fed chair Jerome Powell recently commented on the U.S. economic and corporate health amid the COVID-19 outbreak. Per the Fed chief, global lockdowns and financial squeeze both on household and corporate fronts will leave a prolonged adverse impact.

The Fed chairman cautioned that the current downturn “may last until late 2021.” He also said that the U.S. economy could "easily" contract by 30% in the second quarter. However, he expressed confidence that the economy would recover over the long term, and said he would never bet against the U.S. economy.

He does not see the economy entering another Depression, per CNBC. "This economy will recover. And that means people will go back to work. Unemployment will get back down. We'll get through this," Powell said.

A super-dovish Fed and a Congress, which have already passed about $3 trillion in rescue funds and is planning another round, would hold the economy back from slipping into a depression. The Fed also indicated that the central bank is not out of ammunition and can expand existing programs or add new ones, if needed.

Here's How the Optimism Can be Played Via ETFs

Bet on Small-Caps

Small caps should also gain on massive monetary and fiscal stimulus. In early April, the Fed announced an investment of up to $2.3 trillion in various measures that included loans to aid small and mid-sized businesses too. The Fed’s Main Street Lending program can be considered as a plus for pint-sized stocks.The U.S. government’s virus relief bill should lend support to small-cap stocks. There was a forgivable loan program in place under the scheme of Paycheck Protection Program(read: Fed Goes the Extra Mile: 6 ETF Areas to Win).

The small-cap ETF iShares Russell 2000 ETF (IWM - Free Report) (up 13.4%) beat the S&P 500 (up 5.5%) past month (as of May 26, 2020). While Sprott Junior Gold Miners ETF (SGDJ - Free Report) , Invesco Dynamic Building & Construction ETF (PKB - Free Report) and ALPS Medical Breakthroughs ETF (SBIO - Free Report) are some of the small-cap picks that can enjoy the sector-specific strength, small-cap growth ETFs like Vanguard Growth ETF (VUG - Free Report) and SPDR Portfolio S&P 500 Growth ETF (SPYG - Free Report) can also be played to tap the optimism (read: Bet on "American Magic" With 4 Solid Small-Cap Sector ETFs).

Dollar Strength in the Cards?

Powell’s comments over long-term U.S. economic recovery and ultra-easy monetary policies in other countries should make the U.S. dollar stronger in the coming days. Invesco DB US Dollar Index Bullish Fund (UUP - Free Report) , WisdomTree Bloomberg U.S. Dollar Bullish Fund (USDU - Free Report) and VelocityShares Daily 4x Long USD Vs GBP ETN (DGBP - Free Report) are some of the products to play the trend.

Consumer Stocks to Gain

Bank of America Corp. has begun to see consumer spending inch higher after plummeting with the start of the coronavirus lockdown. Gradual opening of U.S. states is likely to result in an uptick in consumer demand, albeit at a sluggish pace.

Consumers’ income that fell 2% in March and is likely to slide further in April and May due to lockdown, should start to improve ahead, if there is not any second wave of virus contagion. A measure of consumer confidence rose to 86.6 this month from 85.7 in April, according to the Conference Board. Economists polled by Dow Jones expected consumer confidence of 82.3 in May, per CNBC.

Notably, Invesco S&P SmallCap Consumer Discretionary ETF (PSCD - Free Report) jumped 29.4% past month and large-cap Consumer Discretionary SPDR ETF (XLY - Free Report) gained 9.8% past month, breezing past the S&P 500.

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