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ETF Strategies to Gain From US Economic Data Optimism

Sweta Jaiswal, FRM
·5 min read

The United States is pleasantly surprising market participants with upbeat economic data. Notably, the world’s largest economy delivered an impressive performance in third-quarter 2020, beating market expectations. Going by, the Department of Commerce’s report on Oct 29, the GDP surged to a record high at an annualized pace of 33.1% after declining 31.4% in the second quarter.

The manufacturing sector is also picking up despite the coronavirus crisis. According to the Institute for Supply Management (ISM) report on Nov 2, its Purchasing Managers' Index (PMI) for manufacturing surged to 59.3% in October, increasing 3.4 points from the last month. In fact, the October figure also stood out as the highest PMI reading since September 2018.

Furthermore, the housing market continues to be a bright spot in the U.S. economy as it recently delivered a streak of encouraging data. The recently-released data on the U.S. builder confidence was impressive as well. Per the monthly NAHB/Wells Fargo Housing Market Index (HMI), builder confidence for newly-built single-family homes rose to an all-time high of 85 points in October in comparison to 83 points in September, 78 in August and 72 in July. Notably, September and October have emerged as the first two months with the index surpassing 80. Low interest rates are boosting demand in the housing market and resulting in a rise in mortgage applications.

Going on, retail sales data has also managed to impress investors to a large extent. In this regard, sales at retail and food services increased 1.9% in September from August and rose 5.4% on a year-over-year basis, per the US Department of Commerce. In fact, retail sales rose a solid 3.6% in the third quarter compared with the same period a year ago. American shoppers also spent heavily on items such as clothes, sporting equipment and cars along with visiting bars and restaurants, resulting in broad-based spending in September.

Moreover, the preliminary report on October’s U.S. consumer sentiment reflected that the metric rose in early October and touched a seven-month high, largely led by an improved economic outlook along with reopening of economies. According to a Bloomberg article, the University of Michigan’s preliminary consumer sentiment index rose to 81.2 from September’s final reading of 80.4.

It is also worth noting here that the humongous amounts of fiscal and monetary stimulus introduced by the government and the Fed have lent huge support to the upbeat data. Moreover, the central bank's move to keep the benchmark interest rate at a zero or near-zero level has also been a strong support to the U.S. business activities space. Furthermore, gradual reopening of the U.S. economy from the coronavirus-led lockdown also contributed to the impressive economic data.

However, the resurgence in coronavirus cases in the United States and globally along with the uncertainty surrounding the coronavirus outbreak continue to remain major causes of concern. Meanwhile, expectations of a coronavirus vaccine and treatment launch in 2020 can provide further strength to U.S economic data.

ETF Strategies to Follow

Here we discus certain ETF strategies to help investors make the most of the upbeat U.S. economic data amid the coronavirus crisis:

Momentum ETFs to Play

While the broader stock market is expected to gain on optimism surrounding the rebounding U.S. economy and positive developments in coronavirus vaccine research, momentum investing will likely take centerstage as investors seek greater returns in the short term. Momentum investing looks to fetch profits from hot stocks that have shown an uptrend over the past few weeks or months. Investors can consider iShares Edge MSCI USA Momentum Factor ETF MTUM, Invesco DWA Momentum ETF PDP, Invesco S&P MidCap Momentum ETF XMMO, VictoryShares USAA MSCI USA Value Momentum ETF (ULVM) and SPDR Russell 1000 Momentum Focus ETF (ONEO) (read: Here's Why it is the Right Time to Invest in Momentum ETFs).

Bet on Growth ETFs

Growth stocks are generally expected to witness a positive revenue and earnings trend at a faster rate than the industry average. As such, growth funds tend to outperform during an uptrend. While there are several options in the growth ETF world, we highlighted five funds that offer broad-based exposure to the U.S. stock market like Vanguard Growth ETF VUG, Schwab U.S. Large-Cap Growth ETF SCHG, iShares Core S&P U.S. Growth ETF IUSG, SPDR S&P 500 Growth ETF SPYG and Vanguard Mega Cap Growth ETF (MGK) (read: Here's Why Growth ETFs Are Sizzling With Opportunities).

Watch Out for Large-Cap ETFs

The current investment scenario with the U.S. economy gradually picking up makes it sensible to bet on large-cap ETFs as these funds perform well in such scenarios. Therefore, investors can consider SPDR S&P 500 ETF Trust SPY, iShares Core S&P 500 ETF IVV, Vanguard S&P 500 ETF VOO, Schwab U.S. Large-Cap ETF (SCHX), iShares Russell Top 200 ETF (IWL), Vanguard Mega Cap ETF (MGC), Vanguard Mega Cap Growth ETF (MGK) and Multifactor Large Cap ETF (JHML) (read: Can ETFs Enjoy Halloween Effect Despite Rising COVID-19 Fear?).

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SPDR SP 500 ETF (SPY): ETF Research Reports
iShares Core SP 500 ETF (IVV): ETF Research Reports
Vanguard SP 500 ETF (VOO): ETF Research Reports
iShares Core SP U.S. Growth ETF (IUSG): ETF Research Reports
Vanguard Growth ETF (VUG): ETF Research Reports
Invesco DWA Momentum ETF (PDP): ETF Research Reports
SPDR Portfolio SP 500 Growth ETF (SPYG): ETF Research Reports
iShares MSCI USA Momentum Factor ETF (MTUM): ETF Research Reports
Schwab U.S. LargeCap Growth ETF (SCHG): ETF Research Reports
Invesco SP MidCap Momentum ETF (XMMO): ETF Research Reports
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