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Q1 GDP Growth Beats Estimates: ETFs to Buy

Sanghamitra Saha
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The first reading of the U.S. GDP for the first quarter of 2018 advanced at a 2.3% annual rate of growth, below 2.9% growth logged in the fourth quarter but above market expectations of 2%. A moderation in business spending on equipment, lower consumer spending as well as reduced investment in home building caused the economy to witness a lower growth rate in Q1 than the previous quarter.

However, the first quarter of the year always faces seasonal headwinds as a freezing winter put a cap on activity, both at consumer and business levels. Still, it is ‘the lowest growth rate in a year’. So, we can take the estimate-beating reading in a positive way but with a cautious approach. 

Inside the Hindrance

Personal consumption was a bit restrained in Q1 thanks to reduced outlay on cars, clothing and footwear and mired residential investment. Personal consumption expenditure offered 0.73 percentage points to growth (versus 2.75 percentage points in Q4) and increased 1.1% (versus 4% in the previous period), per tradingeconomics.

Fixed investment contributed 0.76 percentage points to growth (compared with 1.31 percentage points in Q4) and rose 4.6% (versus 8.2% in the prior quarter). Investment decelerated for equipment (4.7% compared to 11.6% in Q4) and was stuck for residential (versus 12.8% increase in in the previous period), according to tradingeconomics.

What Are the Sweet Spots?

The labor market is steady and business and consumer confidence is solid, per CNBC. The Consumer Confidence Index rose to 128.7 in April from 127 in March and also came in better than the consensus estimate of 126.2. As per data complied by Moody’s Analytics, business confidence in the United States was 101.38 in March 2018 compared with 101.41 in February.

Economists expect growth to pick up in the second quarter as the Trump administration's $1.5 trillion income tax reform will then be felt on the income of households. The tax cuts were materialized in January. Lower taxes as well as a fiscal boost should translate into 3% economic expansion this year, despite the slow start to the year, per economists.

According to surveys, the tax cuts did not impact many workers' paychecks before late first quarter, quoted on CNBC. Income at the disposal of households grew 3.4% in the first quarter, jumping from the fourth quarter's 1.1% clip. Households’ savings also took a leap during the quarter, per CNBC.

ETFs to Buy

Given such a scenario, we highlight five ETFs that could log growth in the second quarter.

Global X Health & Wellness Thematic ETF BFIT

The fund should benefit from rising consumers’ income. The health & wellness segment has a value focus and should thus be well received even by value-conscious consumers. The fund has gained about 6.8% so far this year (as of Apr 27, 2018).

VanEck Vectors Retail ETF RTH

If tailwinds from tax cuts are materialized in the second quarter, the retail sector may witness some pent-up demand and go higher. The fund has gained more than 6.5% so far this year.

First Trust Small Cap Value AlphaDEX Fund FYT 

Investors can bet on a domestically focused, small-cap ETF on the likely uptick in spending in the second quarter. However, a value focus is warranted while practicing this segment (see all small-cap ETFs here).

SPDR S&P Homebuilders ETF XHB

Investors may target this housing ETF as investment in home building may spring to life after a subdued Q1 (read: Rising Rate Fears Spoil the Planned Party in Housing ETFs).

EventShares U.S. Policy Alpha Fund PLCY

The fund’s objective is to generate capital appreciation by investing in market segments impacted by U.S. government policy and regulation. Since the future of U.S. GDP is related to administration’s policies, the pick is worth a close eye.

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SPDR-SP HOMEBLD (XHB): ETF Research Reports
VANECK-RETAIL (RTH): ETF Research Reports
GLBL-X H&W THM (BFIT): ETF Research Reports
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EVNTSH-US POLCY (PLCY): ETF Research Reports
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