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ETFs at Risk as US Consumer Confidence Sinks to Near 6-Year Low

Sweta Jaiswal, FRM

The latest report on April’s U.S. consumer confidence shows that the metric has seen a record decline, largely due to the coronavirus-led spike in unemployment and shut down of economic activities. The Conference Board's measure of consumer confidence index stands at 86.9 (the lowest since June 2014), below the reading of 118.8 in March, per a Reuters’ article. Moreover, April’s reading missed the consensus estimate of 87.9, per a Reuters’ poll.

The Present Situation Index, which gauges consumer views on current market conditions, declined 90 points to 76.4, per a Reuters’ article. 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, rose from 86.8 to 93.8 in April, per a Reuters’ article. It is being believed that the improvement in the expectations measure was largely due to reopening of several U.S. states.

Coronavirus Impacts Economy

The pandemic is sparking fears of a global economic recession among investors as the outbreak is disrupting global supply chains followed by the shutdown of economic activities. The market participants also seem to be worried about the pandemic’s impact on corporate earnings.

The job market is also expected to be disrupted as Americans are filing claims for unemployment benefits. The weekly jobless claim data showed another 4.4 million Americans filing for unemployment benefits in the week ending Apr 17. This has lifted total claims to over 26.5 million since Mar 21, meaning that the coronavirus-led layoffs eliminated all jobs created since the Great Recession. With rising unemployment levels, the spending capacity of consumers will, undoubtedly, be compromised to a great extent. In fact, the latest preliminary report on April’s U.S. consumer sentiment shows that the metric has seen a record decline. Moreover, the housing sector is being impacted by the bleak job market scenario. In its 35-year history, the index measuring the homebuilder sentiment, has witnessed the sharpest monthly decline (per a CNBC article).

Notably, JPMorgan Chase & Co. economists project that the global economy will see lost output at $5.5 trillion or almost 8% of GDP through the end of 2021, per a Bloomberg article. Moreover, they believe that the cost to developed economies will be similar to what was borne during the 2008-2009 and 1974-1975 recessions, per the report.

Going on, per a Reuters’ survey of economists, U.S. GDP is expected to shrink at a 4.0% annualized rate in the first quarter of 2020. This can be the steepest pace of decline since the Great Recession, ending the streak of growth in a record 11 straight years, per a Reuters’ article.

ETFs That Might Suffer

The outbreak is expected to have impacted 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 $11.60 billion. It tracks the Consumer Discretionary Select Sector Index, holding 63 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: Online Sales to Boost Amazon Q1 Earnings: ETFs to Buy).

Vanguard Consumer Discretionary ETF VCR

This fund currently follows the MSCI US Investable Market Consumer Discretionary 25/50 Index and holds 295 stocks in its basket. VCR charges investors 10 bps in annual fees. The product has managed $2.54 billion in its asset base and carries a Zacks ETF Rank #2, with a Medium-risk outlook (read: ETF Areas to Gain From Plunging Oil Prices).

Fidelity MSCI Consumer Discretionary Index ETF FDIS

This fund tracks the MSCI USA IMI Consumer Discretionary Index, holding 283 stocks in its basket. The product has amassed $632.8 million in its asset base. It charges 8 bps in annual fees from investors and carries a Zacks ETF Rank #3 (Hold), with a Medium-risk outlook.

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 124 stocks. FXD has AUM of $160.6 million. It charges 64 bps in annual fees and has a Zacks ETF Rank #3, with a Medium-risk outlook.

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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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