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U.S. Job Data Relieves Investors: ETFs to Consider

Zacks Equity Research

After back-to-back months of weak job growth, U.S. hiring was stronger-than-expected in June, shrugging off all fears about the momentum loss in the labor market. The month of June saw the addition of 287,000 new jobs – the highest in eight months, which is way above a 180,000 rise expected by analysts.

June job growth also breezed past a downwardly revised and a shockingly low 11,000 last month. So, by now it is clear that May job data was a one-time event and a strike in Verizon was responsible for plenty of job losses.

In June, leisure and hospitality added 59,000 jobs in June. Health care and social assistance and information also generated about 58,000 and 44,000 jobs, respectively, in June. The unemployment rate rose to 4.9%, as more Americans entered the workforce.

Average hourly earnings nudged up 2 cents or about 0.1% to $25.61, which showed a slowdown. Even a downtrodden month like May saw 0.2% growth in average hourly rate. On a year-on-year basis, wage growth was 2.6% after rising 2.5% in May.

Fed Hike or Not?

Many may think that this rebound in the labor market might prompt the Fed to pull its trigger on further policy tightening in the near term. But lukewarm pay growth has put a question mark on the move. We believe that the Fed would like to see more stabilization in the job market before reviewing its policy (read: Dovish Fed Trims U.S. Outlook: ETFs to Buy).

Plus, the latest job report was not as stellar as we saw in earlier months. The three-month average new jobs’ gain figure came in at 147,000 – down from nearly 200,000 recorded in the first quarter – indicating room for improvement.  Also, the expected contagion of the Brexit fallout on the global economy is yet to be realized and seems strong enough to keep the Fed away from hiking rates.

Market Impact

No matter what the Fed chooses to do, the market welcomed this bout of optimism after Brexit-induced worries and sell-off.  As a result, the stock market saw joyous trading on July 8 -- the day the job data released. Among the big ETFs, SPY gained about 1.5%, DIA added 1.4% and QQQ advanced about 1.6% in the session. However, all three ETFs were down slightly after hours.

As far as the bond market is concerned, shorter-term, two-year U.S. Treasury bond yields rose 3 bps to 0.61% on July 8 as investors feared a Fed rate hike sooner or later; but the yield on the 10-year U.S. Treasury note slipped 3 bps to 1.37%.

Given this, we have highlighted ETFs that are the direct beneficiaries of job gains and will likely see smooth trading in the days ahead.

ETFs to Consider

PowerShares DB US Dollar Bullish Fund UUP

A healing job market translates into an improving economy which in turn will attract more capital into the country and lead to the strengthening of the U.S. dollar. UUP is the prime beneficiary of the rising dollar as it offers exposure to a basket of six world currencies – euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. UUP added about 0.04% on July 8 and tacked on about 0.2% gains after hours (read: Best Performing Currency ETFs of 1H16).

Wisdomtree Smallcap Dividend DES

Since small-cap stocks are mostly tied to the domestic economy, a turnaround in the labor market will bode well for the homeland as well as small-cap ETFs. And nothing could be better than a dividend quotient added to this capitalization in the present rocky environment. Probably this is why DES, which yields about 2.84% annually, added over 2.2% on July 8 and is likely to be a hot favorite in the near term (read: Small-Cap Value ETFs: The Right Play Now?).

IQ US Real Estate Smallcap ETF ROOF

As long-term U.S. Treasury yields are toying with record-low levels and the economy is gathering steam, this could be the right time to play a real estate ETF with a small-cap focus. Investors should note that real-estate ETFs are rate-sensitive and perform well in a low-rate environment. Also, the sector is high-yielding in nature. ROOF yields about 5.46% annually and added over 1.9% on July 8 (read: 3 Real Estate ETFs to Play Brexit Fears).

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SPDR-DJ IND AVG (DIA): ETF Research Reports
 
SPDR-SP 500 TR (SPY): ETF Research Reports
 
NASDAQ-100 SHRS (QQQ): ETF Research Reports
 
PWRSH-DB US$ BU (UUP): ETF Research Reports
 
WISDMTR-SC DIV (DES): ETF Research Reports
 
IQ-US RE SC (ROOF): ETF Research Reports
 
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