ETF Areas to Win on Smashing Q1 U.S. GDP Growth

The U.S. economy grew an annualized 6.4% in the first quarter of 2021, breezing past expectations of 6.1%, following a 4.3% uptick in the previous three-month period. Apart from the reopening-driven third-quarter jump last year, the latest reading marked the best period for GDP since the third quarter of 2003.

Rise in personal consumption, fixed residential and nonresidential investment, and government spending more than made up fall in inventories and exports. Consumer spending, which accounts for more than two-thirds of U.S. GDP, rose 10.7% compared with a 2.3% uptick in the previous period.Spending on services also grew 4.6%. The expenditure on goods increased as much as 23.6%.

The labor market is steady as well. Thanks to multiple rounds of government relief payments, households now hold a joint $4.1 trillion in savings in the first quarter, considerably up from $1.2 trillion before the pandemic began.

Against this backdrop, we highlight a few ETF areas that could fetch investors some solid returns.

Consumer ETFs

Upbeat consumer spending was the sweet spot in the Q1 U.S. GDP growth report. Gregory Daco, chief U.S. economist at Oxford Economics expects consumer spending to expand by more than 9% this year, a record, as quoted on New York Times.

“With the elevated saving rate, households are still flush with cash and, now that restrictions are being eased as the vaccination program proves a success, that will allow them to boost spending on the worst-affected services, without needing to pull back too much on goods spending,” per Paul Ashworth, chief U.S. economist at Capital Economics, as quoted on CNBC. Consumer Discretionary Select Sector SPDR ETF XLY and iShares Evolved U.S. Consumer Staples ETF (IECS) should be in a beneficial position.

Blend ETFs

A solid pickup in broad-based economic growth as well as an accommodative monetary policy bodes well for growth stocks across all spectrums. Meanwhile, such optimism would boost bond yields to some extent, giving a boost to the value corner of the market too. Overall, this is a great scenario for blend stocks and ETFs like SPDR S&P 500 ETF SPY.

Bank ETFs

Banks are in the sweetest spot as strong household savings ruled the fear for delinquencies or default on loans in the banking sector. In any case, banking is an undervalued sector currently. Earnings have been upbeat in the sector. A prospective rising rate environment is another plus for the banking stocks. SPDR S&P Bank ETF KBE is thus a good bet (read: Banking Earnings Upbeat: Time to Buy Financial ETFs on Value?).

Small-Cap ETFs

Since small-cap stocks benefit greatly from an uptick in the domestic economy, related ETFs like iShares Russell 2000 ETF IWM should gain ahead. Economist Daco’s firm estimates that the U.S. economy will expand about 13% on an annual basis in Q2. For the year, it expects growth of 7.5%, the best performance since 1951, the New York Times article noted.

Communication ETFs

Accommodative polices across the globe and upbeat earnings from some big technology companies are tailwinds to communication ETFs. Investors should also note that services consumption growth (though sluggish) has recoiled in Q1. Assuming consumers’ greater inclination toward consuming communication services, we quote S&P 500 Communication Sector SPDR ETF XLC as a buy.

Semiconductor ETFs

Consumers’ inclination toward buying durable goods like motor vehicles and appliances (up 41.4% in the first quarter) puts the semiconductor ETF VanEck Vectors Semiconductor ETF SMH in a decent spot. Chips are used in the automotive sector and big-ticket electronic items. Hence, demand for chips – which is in fact witnessing the supply crunch currently – should be upbeat for the year.

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SPDR-SP 500 TR (SPY): ETF Research Reports
ISHARS-R 2000 (IWM): ETF Research Reports
SPDR-KBW BANK (KBE): ETF Research Reports
VANECK-SEMICON (SMH): ETF Research Reports
SPDR-CONS DISCR (XLY): ETF Research Reports
SPDR-COMM SV SS (XLC): ETF Research Reports
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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