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ETFs to Watch on Increasing Consumer Credit

Zacks Equity Research

The Federal Reserve reported on Tuesday that consumer credit increased in July, an indication of rising consumer confidence in a favorable economic environment. It was reported that the volume of consumer credit rose by $19.1 billion or at an annual rate of 6.7% in July, outpacing the consensus estimate of $18 billion. This was preceded by a gain of $27 billion in June. Moreover, with July’s increase, consumer credit finished in the positive territory every month for nearly four years.


According to the report, revolving credit in July increased at an annual pace of 5.7% after surging 10% in June. Non-revolving credit, which includes auto and student loans, also witnessed a gain of 7%, preceded by June’s rise of 9.4%. This encouraging report indicated that consumers who play an important role in boosting the U.S. economy are gradually gaining confidence on the back of a recovering economy, low oil prices and a steady labor market.


Consumers Boosting Economy     


The rise in consumer spending has helped the U.S. economy to rebound strongly in the second quarter after witnessing sluggish first quarter growth. The “second estimate” released by the U.S. Department of Commerce showed that the GDP in the second quarter advanced at a pace of 3.7%, compared to the first quarter’s rise of only 0.6%. According to the report, consumer spending, which contributes more than 75% to economic activity, rose 3.1% during the second quarter, outpacing the first quarter’s growth rate of 1.8%. It contributed more than 2.1% to the second quarter GDP, the highest by any segment (read: Consumers Drive Q2 GDP Higher: 2 Retail ETF to Buy).


Meanwhile, the consumer credit report indicated that auto loans – a key component in the non-revolving credit segment – played an important part in boosting debt volume in this section. This is evident from the encouraging auto sales report released recently. In August, the automakers witnessed the highest rate of increase in light vehicle sales in the U.S. in 10 years. Along with factors such as low oil prices, a recovering economy and an improving labor market condition, easy availability of credit with lower interest rates and longer repayment periods also helped consumers to spend more in the auto sector (read: CARZ ETF Zooms Ahead on 10-Year High Auto Sales).


Factors Lifting Consumer Sentiment 


A steady job market had no little impact in the recent boost to consumer sentiment. Though the U.S. job numbers in August grew at the most sluggish pace in five months, the unemployment rate dropped to 5.1% from 5.2%, the lowest since April 2008. Moreover, the job report showed that average hourly wages rose 0.3% sequentially and 2.2% year over year (read: ETFs to Move on Mixed U.S. Job Data).


Meanwhile, the slump in oil prices is another important factor that enabled U.S. consumers to spend more over the past few months. Oil price skidded to half over the past one year amid increasing production, a large supply glut and sluggish demand. The situation is hardly expected to improve in the near future as there is little hope of a reduction in oil supply. While the U.S. and Organization of Petroleum Exporting Countries (OPEC) are still producing oil at multi-year highs, Iran is looking to boost its production once the Tehran sanctions are lifted (read: Oil Refiner ETF (CRAK): A Better Buy Amid Weak Energy).


ETFs to Consider


ETFs exposed to sectors that attract a major part of consumer spending are poised to gain from this bullish consumer credit report. As mentioned above, the auto sector was one to receive a significant part of consumer credit in July. In this situation, investors may consider the auto ETF – First Trust NASDAQ Global Auto ETF (CARZ) – in order to tap the positive trend. CARZ holds a Zacks ETF Rank #2 (Buy) and gained nearly 3.9% yesterday and around 3.4% over the past one week.


Separately, another sector that receives a notable share of consumer spending is consumer discretionary. Positive consumer credit data also had a positive impact on ETFs that are exposed to this sector. Among them, Consumer Discretionary Select Sector SPDR ETF (XLY), SPDR S&P Retail ETF (XRT) and iShares US Consumer Services (IYC) gained 2.3%, 2% and 2.3% yesterday, respectively. The ETFs mentioned above hold either a Zacks ETF Rank #1 (Strong Buy) or a Zacks ETF Rank #2 (Buy) and may thus be in the radar of investors looking to gain from the favorable scenario. 


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SPDR-CONS DISCR (XLY): ETF Research Reports
SPDR-SP RET ETF (XRT): ETF Research Reports
ISHARS-US CN CY (IYC): ETF Research Reports
FT-NDQ GL AUTO (CARZ): ETF Research Reports
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