Markets

ETFs at Risk as U.S. Consumer Confidence Slips to Six-Year Low

Worries about job prospects and business conditions have deeply impacted U.S. consumer confidence in August, slipping to the lowest level since 2014. The Conference Board's measure of consumer confidence index stands at 84.8, comparing unfavorably with July’s revised reading of 91.7. Moreover, July’s reading lagged the consensus estimate of 93, per a Bloomberg’s poll.

The Present Situation Index, which gauges consumer views on current business and labor market conditions, declined 11.7 points from July to 84.2 in August. Meanwhile, 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 3.7 points from the previous month to 85.2 in August. It is being believed that given the uncertainty surrounding the coronavirus pandemic after the rise in the number of new cases in June and July, consumer spending might not rise in the near term at least. Also, consumers seem to be eagerly waiting for another round of Federal stimulus package given the high level of unemployment, per a MarketWatch article.

Commenting on the consumer confidence data, Lynn Franco, senior director of economic indicators at The Conference Board, said that “consumer spending has rebounded in recent months but increasing concerns amongst consumers about the economic outlook and their financial well-being will likely cause spending to cool in the months ahead,” per a MarketWatch article.

Current U.S. Economic Situation

New coronavirus cases in the United States seem to be slowing down, which is filling investors with new enthusiasm. The U.S. economy has started to reopen in phases and there is massive Fed and government stimulus to combat the crisis which can help the economy rebound. The Federal Reserve officials currently hold the overnight borrowing rate in a range of 0-0.25% after the Jul 28-29 meeting.

The latest preliminary report on August’s U.S. consumer sentiment shows that the metric has remained mostly stable, largely due to concerns surrounding the aggravating coronavirus outbreak. The University of Michigan’s preliminary consumer sentiment index rose to 72.8 in August from 72.5 in July but was down from last August’s reading of 89.8, per tradingeconomics.

The improving manufacturing numbers have instilled optimism among investors. According to data firm IHS Markit, its composite purchasing managers index that measures both manufacturing and service activities jumped to 54.7 in August from 50.3 in July, registering an 18-month high.

The housing sector seems to be a bright spot in the U.S. economy amid the coronavirus crisis as sales of existing homes in July witnessed the strongest monthly rise in the survey’s history since 1968. The recently-released data on the U.S. builder confidence was upbeat as well. Another round of upbeat data from the U.S. housing market signals that the sector is gaining momentum back.

ETFs That Might Suffer

The weakening consumer confidence can affect the consumer discretionary sector, which attracts a major portion of consumer spending. Below, we have highlighted the four most popular ones that target the broader consumer discretionary sector (see all Consumer Discretionary ETFs):

The Consumer Discretionary Select Sector SPDR Fund XLY

This is the largest and most popular product in the consumer discretionary space, with AUM of $15.94 billion. It tracks the Consumer Discretionary Select Sector Index, holding 61 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: S&P 500 Near Record Close: 3 Winning Sectors & ETFs).

Vanguard Consumer Discretionary ETF VCR

This fund currently follows the MSCI US Investable Market Consumer Discretionary 25/50 Index and holds 292 stocks in its basket. VCR charges investors 10 bps in annual fees. The product has managed $3.94 billion in its asset base and carries a Zacks ETF Rank #3 (Hold), with a Medium-risk outlook (read: Will Coronavirus Vaccine Optimism Drive These ETFs?).

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 $1.08 billion. It charges 64 bps in annual fees and has a Zacks ETF Rank #3, with a Medium-risk outlook.

Fidelity MSCI Consumer Discretionary Index ETF FDIS

This fund tracks the MSCI USA IMI Consumer Discretionary Index, holding 253 stocks in its basket. The product has amassed $1.08 billion in its asset base. It charges 8 bps in annual fees from investors and carries a Zacks ETF Rank #3, with a Medium-risk outlook (read: Starbucks' Q3 Earnings Top Amid Coronavirus Crisis: ETFs to Gain).

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Vanguard Consumer Discretionary ETF (VCR): ETF Research Reports

Consumer Discretionary Select Sector SPDR ETF (XLY): ETF Research Reports

First Trust Consumer Discretionary AlphaDEX ETF (FXD): ETF Research Reports

Fidelity MSCI Consumer Discretionary Index ETF (FDIS): 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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