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Despite paltry growth in second-quarter GDP, consumer spending recorded an encouraging increase, according to the “second estimate” of the Bureau of Economic Analysis (BEA). Favorable labor market conditions and gradually recovering economic conditions had a positive impact on household expenditure. The consumer discretionary sector, which attracts a major part of consumer spending, is poised to benefit from this favorable backdrop.
Robust Consumer Spending in Q2
BEA’s “second estimate” of second quarter GDP shows that the U.S. economy expanded at an annualized rate of 1.1% during the quarter, slightly below its earlier estimate of 1.2%. A year-on-year decline of $12.4 billion in business inventories, which made a negative contribution of 1.26% to second-quarter GDP, was the main culprit. However, the growth rate came in higher than the 0.8% rise witnessed in the first (read: Online Shopping Gaining Traction: ETFs to Buy).
An encouraging increase in consumer expenditure emerged as one of the few bright spots in the GDP report. According to the report, consumer spending in the second quarter jumped 4.4% from the year-ago level, rising at a fastest rate since the last quarter of 2014. It was also above the growth rate of 4.2% estimated earlier. Consumer expenditure, the largest contributor to U.S. GDP, accounted for 2.94 percentage points of GDP growth, the highest in more than a year. It also helped to offset the negative contributiontobusiness inventories.
While consumer spending on goods during the second quarter surged at an annualized rate of 7.1%, the highest in more than three years, expenditure on services rose 3.1%, reflecting the fastest pace of increase since the last quarter of 2014. Moreover, personal consumption expenditures rose 0.3% last month, increasing for the fourth-consecutive month, as per the Commerce Department. The gain came on the back of a 0.4% increase in personal income in July, which was the highest increase since April (read: 4 Consumer Discretionary ETFs to Buy on Increased Spending).
Bright Outlook
The economic outlook for the second half of the year remains strong despite sluggish growth in the second quarter. At Jackson Hole, Fed chair Janet Yellen indicated that the economy is on its path to witness improvement. She said that the central bank “expects moderate growth in real gross domestic product, additional strengthening in the labor market, and inflation rising to 2% over the next few years.” She also added that the economic environment is favorable enough “to generate further improvement in the labor market.” Currently, the Atlanta Fed is projecting third-quarter GDP at 3.4% (read: Is it Time to Invest in Financial ETFs?).
Also, the labor market continues to exhibit a high degree of strength and this should continue to boost consumer expenditure. Meanwhile, the reduction in business inventories, the primary culprit when it comes to a fall in estimated GDP, is expected to give a boost to the industry as it will result in a buildup of fresh inventories. Moreover, recently released economic data, which include significant decline in trade deficit, and an increase in residential construction and durable orders, confirmed that the economy is improving.
4 Consumer Discretionary ETFs to Gain
Sectors on which consumers spend a significant portion of their income are poised to gain from this encouraging scenario. Among these, consumer discretionary is the one that is considered one of the biggest beneficiaries of rising consumer spending. Thus, we have highlighted four ETFs from the sector, which also include two retail ETFs that may gain in the days ahead given an improving economic scenario. These ETFs carry a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.
Consumer Discretionary Select Sector SPDR Fund (XLY - Free Report)
This product offers exposure to the broad consumer discretionary space by tracking the Consumer Discretionary Select Sector Index. With an asset base of $9.9 billion, XLY is the largest and most popular ETF in its space. It holds 89 shares in its basket. Sector wise, Media takes the top spot with 21.2% of the assets, closely followed by Specialty Retail (21.2%). The product trades in a solid volume of 5 million shares per day and charges 14 bps in fees. The ETF gained 2.4% in the past three months and has added 3.9% year to date (read: 3 ETFs in Focus Following Disney's Robust Q3 Earnings).
This ETF follows the MSCI U.S. Investable Market Consumer Discretionary 25/50 Index and holds a large basket of 387 stocks. As far as sector allocation is concerned, Internet Retail takes the top spot in the fund (14.9%) followed by Restaurants (10.3%), Cable & Satellite (9.8%) and Movies & Entertainment (9.6%). The product has managed to accumulate roughly $1.9 billion in its asset base so far and trades in a moderate volume of nearly 87,000 shares per day. It is dirt cheap with 10 bps in annual fees. VCR gained 2.9% and 3.9% over the past three-month and year-to-date timeframe, respectively.
This product offers exposure to the retail space by tracking the S&P Retail Select Industry Index. With an asset base of $522.4 million, XRT is the largest and most popular ETF in the retail space. It holds 97 shares in its basket. Sector wise, apparel retail takes the top spot with more than one-fourth of the assets, followed by specialty stores (17.6%). The product trades in a solid volume of more than 4 million shares per day and charges 35 bps in fees. The ETF gained 6.9% and 4.6% over the past three-month and year-to-date timeframe, respectively.
This fund provides exposure to the 26 largest retail firms by tracking the MVIS U.S. Listed Retail 25 Index. The ETF has a certain tilt toward specialty retail, which accounts for 28% share while Internet retail (20%), hypermarkets (12%), department stores (10%) and healthcare services (10%) round off to the top five. The product has amassed $32.7 million in its asset base and charges 35 bps in annual fees. Volume is moderate as it exchanges nearly 27,000 shares per day. RTH gained 4.2% and 2.5% over the past three months and year to date, respectively.
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4 ETFs to Gain from Healthy Consumer Spending
Despite paltry growth in second-quarter GDP, consumer spending recorded an encouraging increase, according to the “second estimate” of the Bureau of Economic Analysis (BEA). Favorable labor market conditions and gradually recovering economic conditions had a positive impact on household expenditure. The consumer discretionary sector, which attracts a major part of consumer spending, is poised to benefit from this favorable backdrop.
Robust Consumer Spending in Q2
BEA’s “second estimate” of second quarter GDP shows that the U.S. economy expanded at an annualized rate of 1.1% during the quarter, slightly below its earlier estimate of 1.2%. A year-on-year decline of $12.4 billion in business inventories, which made a negative contribution of 1.26% to second-quarter GDP, was the main culprit. However, the growth rate came in higher than the 0.8% rise witnessed in the first (read: Online Shopping Gaining Traction: ETFs to Buy).
An encouraging increase in consumer expenditure emerged as one of the few bright spots in the GDP report. According to the report, consumer spending in the second quarter jumped 4.4% from the year-ago level, rising at a fastest rate since the last quarter of 2014. It was also above the growth rate of 4.2% estimated earlier. Consumer expenditure, the largest contributor to U.S. GDP, accounted for 2.94 percentage points of GDP growth, the highest in more than a year. It also helped to offset the negative contributiontobusiness inventories.
While consumer spending on goods during the second quarter surged at an annualized rate of 7.1%, the highest in more than three years, expenditure on services rose 3.1%, reflecting the fastest pace of increase since the last quarter of 2014. Moreover, personal consumption expenditures rose 0.3% last month, increasing for the fourth-consecutive month, as per the Commerce Department. The gain came on the back of a 0.4% increase in personal income in July, which was the highest increase since April (read: 4 Consumer Discretionary ETFs to Buy on Increased Spending).
Bright Outlook
The economic outlook for the second half of the year remains strong despite sluggish growth in the second quarter. At Jackson Hole, Fed chair Janet Yellen indicated that the economy is on its path to witness improvement. She said that the central bank “expects moderate growth in real gross domestic product, additional strengthening in the labor market, and inflation rising to 2% over the next few years.” She also added that the economic environment is favorable enough “to generate further improvement in the labor market.” Currently, the Atlanta Fed is projecting third-quarter GDP at 3.4% (read: Is it Time to Invest in Financial ETFs?).
Also, the labor market continues to exhibit a high degree of strength and this should continue to boost consumer expenditure. Meanwhile, the reduction in business inventories, the primary culprit when it comes to a fall in estimated GDP, is expected to give a boost to the industry as it will result in a buildup of fresh inventories. Moreover, recently released economic data, which include significant decline in trade deficit, and an increase in residential construction and durable orders, confirmed that the economy is improving.
4 Consumer Discretionary ETFs to Gain
Sectors on which consumers spend a significant portion of their income are poised to gain from this encouraging scenario. Among these, consumer discretionary is the one that is considered one of the biggest beneficiaries of rising consumer spending. Thus, we have highlighted four ETFs from the sector, which also include two retail ETFs that may gain in the days ahead given an improving economic scenario. These ETFs carry a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.
Consumer Discretionary Select Sector SPDR Fund (XLY - Free Report)
This product offers exposure to the broad consumer discretionary space by tracking the Consumer Discretionary Select Sector Index. With an asset base of $9.9 billion, XLY is the largest and most popular ETF in its space. It holds 89 shares in its basket. Sector wise, Media takes the top spot with 21.2% of the assets, closely followed by Specialty Retail (21.2%). The product trades in a solid volume of 5 million shares per day and charges 14 bps in fees. The ETF gained 2.4% in the past three months and has added 3.9% year to date (read: 3 ETFs in Focus Following Disney's Robust Q3 Earnings).
Vanguard Consumer Discretionary ETF (VCR - Free Report)
This ETF follows the MSCI U.S. Investable Market Consumer Discretionary 25/50 Index and holds a large basket of 387 stocks. As far as sector allocation is concerned, Internet Retail takes the top spot in the fund (14.9%) followed by Restaurants (10.3%), Cable & Satellite (9.8%) and Movies & Entertainment (9.6%). The product has managed to accumulate roughly $1.9 billion in its asset base so far and trades in a moderate volume of nearly 87,000 shares per day. It is dirt cheap with 10 bps in annual fees. VCR gained 2.9% and 3.9% over the past three-month and year-to-date timeframe, respectively.
SPDR S&P Retail ETF (XRT - Free Report)
This product offers exposure to the retail space by tracking the S&P Retail Select Industry Index. With an asset base of $522.4 million, XRT is the largest and most popular ETF in the retail space. It holds 97 shares in its basket. Sector wise, apparel retail takes the top spot with more than one-fourth of the assets, followed by specialty stores (17.6%). The product trades in a solid volume of more than 4 million shares per day and charges 35 bps in fees. The ETF gained 6.9% and 4.6% over the past three-month and year-to-date timeframe, respectively.
VanEck Vectors Retail ETF (RTH - Free Report)
This fund provides exposure to the 26 largest retail firms by tracking the MVIS U.S. Listed Retail 25 Index. The ETF has a certain tilt toward specialty retail, which accounts for 28% share while Internet retail (20%), hypermarkets (12%), department stores (10%) and healthcare services (10%) round off to the top five. The product has amassed $32.7 million in its asset base and charges 35 bps in annual fees. Volume is moderate as it exchanges nearly 27,000 shares per day. RTH gained 4.2% and 2.5% over the past three months and year to date, respectively.
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Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>