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Consumer Discretionary ETFs to Shine as US Economy Reopens

·5 min read

The world’s largest economy is steadily recovering from the coronavirus outbreak-induced slowdown. Notably, cyclical sectors like industrial, financial, energy and consumer discretionary have witnessed increased attention from investors this year. Markedly, stocks within the cyclical sectors mostly behave in tandem with the prevalent economic conditions and when growth returns to normal levels, these sectors will automatically perform well.

The pandemic also seems to be getting under control in the United States. Going by data compiled by Johns Hopkins University, the seven-day average of new infections was about 26,000 as of May 23, per a CNBC article. Encouragingly, the number of cases have declined to the lowest level since June 2020.

Accelerated coronavirus vaccine rollout has been the major factor that has helped gaining control over the aggravating outbreak. Notably, more than 151 million Americans belonging to the age group of 18 years and above or 58.7% of the U.S. adult population have been administered at least one dose of a COVID-19 vaccine as of May 12, per data from the Centers for Disease Control and Prevention (CDC) (as mentioned in a CNBC article).

The decline in the number of coronavirus cases has increased optimism among market participants toward faster recovering and reopening of the U.S. economy. An increasing number of people are expected to travel and go for vacations starting Memorial Day weekend, which is also considered to be the unofficial beginning of the summer travel season, according to the same article.

Moreover, a change in consumer behavior and shopping patterns is being observed as Americans are visiting stores for shopping merchandise like new clothes which signal toward normalcy. Large retailers like Walmart (WMT), Target (TGT), Home Depot and Macy’s have been gaining from the reopening economy and gradual return to normalcy.

In another encouraging development, Moderna (MRNA) recently announced an impressive update relating to mRNA-1273. The company has announced that the Phase 2/3 study of its COVID-19 vaccine (mRNA-1273) in adolescents has met its primary immunogenicity endpoint. Markedly, there was no record of coronavirus cases among participants who were administered both the mRNA-1273 doses.

According to the company, a 93% vaccine efficacy was recorded in seronegative participants beginning 14 days after the first dose applying the secondary CDC case definition of COVID-19, which tested for milder disease.

Going on, the latest public health guidelines issued by the CDC have relaxed restrictions on wearing masks at indoor and public gatherings. According to the new recommendations, completely vaccinated people do not need to wear masks or stay six feet away from others at indoor or outdoor gatherings, per a CNBC article.

Commenting on the current market scenario, Goldman Sachs, managing director Chris Hussey, recently said that “Two macro factors may be contributing to the increased confidence in the recovery today: signs of higher inflation and signs of better job placement,” in a CNBC article.

ETFs That Might Gain

The latest U.S. consumer confidence data looks decent as the metric has remained steady in May after registering gains in April. The Conference Board's measure of consumer confidence index stands at 117.2 for May, mostly flat in comparison with April’s reading of 117.5. Moreover, May’s reading missed the consensus estimate of 119.2, per a Reuters’ poll.

Lynn Franco, Senior Director of Economic Indicators at The Conference Board, has also reportedly said, “Overall, consumers remain optimistic, and confidence should remain resilient in the short term, as vaccination rates climb, COVID-19 cases decline further, and the economy fully reopens."

The moderate improvement in consumer confidence is likely to boost the consumer discretionary sector, which attracts a major portion of consumer spending. Also, the space comprises businesses that sell goods and services, which are considered non-essential by consumers. Markedly, the sector is likely to be a major gainer as the U.S. economy gradually reopens and is recovering from the pandemic-induced slump.

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 $19.39 billion. It tracks the Consumer Discretionary Select Sector Index. The fund charges 12 basis points (bps) in fees per year and carries a Zacks ETF Rank #2 (Buy), with a Medium-risk outlook (read: ETFs in Focus as Amazon Agrees to Buy MGM Studio).

Vanguard Consumer Discretionary ETF VCR

This fund currently follows the MSCI US Investable Market Consumer Discretionary 25/50 Index. VCR charges investors 10 bps in annual fees. The product has managed $5.94 billion in its asset base and carries a Zacks ETF Rank #2, with a Medium-risk outlook (read: Will ETFs Gain on Starbucks' Q2 Earnings Beat Amid Pandemic?).

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. FXD has AUM of $1.81 billion. It charges 63 bps in annual fees and has a Zacks ETF Rank #3 (Hold), with a Medium-risk outlook (read: US Consumer Confidence Stays Stable in May: ETFs in Spotlight).

Fidelity MSCI Consumer Discretionary Index ETF FDIS

This fund tracks the MSCI USA IMI Consumer Discretionary Index. The product has amassed $1.55 billion in its asset base. It charges 8 bps in annual fees from investors and carries a Zacks ETF Rank #2, with a Medium-risk outlook (read: Bet on These 5 Top-Ranked ETFs to Boost Portfolio Returns).

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VIPERS-CONS DIS (VCR): ETF Research Reports
SPDR-CONS DISCR (XLY): ETF Research Reports
FT-CONSUMR DIS (FXD): ETF Research Reports
FID-CON DIS (FDIS): ETF Research Reports
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