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U.S. Q3 GDP Better Than Expected: ETFs to Benefit

Sanghamitra Saha

The U.S. economy grew an annualized 1.9% in the third quarter of 2019, surpassing expectations of 1.6%, following a 2% uptick in the previous three-month period. Softer business spending weighed on GDP while continued consumer spending as well as government expenditures contributed positively to the growth. Needless to say, tariffs and a global slowdown dented the U.S. economic growth to some extent.

Consumer spending, which accounts for more than two-thirds of U.S. GDP, rose 2.9%, following a 4.6% uptick in Q2. Consumption of goods (5.5% versus 8.6% last quarter), especially durable goods (7.6% growth against 13.0% recorded in Q2), and services (1.7% versus 2.8% reported in the previous quarter) basically provided the wind under the wings. 

Federal government spending grew 3.4% (versus 8.3% in Q2) and state and local government spending rose 1.1% (versus 2.7% in Q2). Residential fixed investment recoiled to expansion of 5.1% versus a decline of 3%.

However, business investment slumped 3%, marking the steepest contraction in more than 3-1/2 years. Decline in spending on equipment and nonresidential structures such as mining exploration, shafts and wells led to this plunge.

That said, the GDP scorecard shows that though there are pockets of weakness, the U.S. economy is better positioned than most developed economies. Investors should note that the PCE price index – that the Fed consults as an inflation measure – rose 1.5% compared with an increase of 2.4%. Barring food and energy prices, the PCE price index rose 2.2% compared with an increase of 1.9%.

Against this backdrop, the below-mentioned ETF areas could benefit from the third-quarter U.S. GDP data.

Consumer ETFs

Still-decent consumer spending was the sweet spot in the Q3 U.S. GDP growth report.  Consumer Discretionary Select Sector SPDR ETF XLY and iShares U.S. Consumer Services ETF IYC should be in a beneficial position. This is especially true given the fact that consumer stocks and ETFs perform well in the holiday season. Both funds added 0.6% and 0.4% on Oct 30 (read: Tap Revenue Growth With These ETFs & Dump Earnings Recession).

Muni Bond ETFs

Federal, state and local government spending rose in the third quarter. Investors should note that states and localities issue bonds mainly to fund large and long-lived capital projects. Investors can tap this uptick in government spending by investing in muni bond ETFs like iShares National Muni Bond ETF MUB (read: Tap Muni Market With an ETF-Of-ETFs Approach).

The underlying S&P National AMT-Free Municipal Bond Index measures the performance of the investment-grade segment of the U.S. municipal bond market and there were 8,274 issues on the index. The index includes municipal bonds from issuers that are primarily state or local governments or agencies such that the interest on the bond is exempt from U.S. federal income taxes. The fund yields 2.46% annually. It was up 0.16% on Oct 30.

Real Estate

Since residential investments staged a bounce back in Q3, real estate ETFs should prosper ahead. A low-rate environment is also a positive for the sector. IQ U.S. Real Estate Small Cap ETF ROOF, which yields about 6% annually, appears a good bet in this regard. Investors can also bet on large-cap fund Vanguard Real Estate ETF VNQ, which yields about 3.33% annually (read: Global Real Estate ETFs Scaling Higher: Here's Why).

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iShares U.S. Consumer Services ETF (IYC): ETF Research Reports
 
Vanguard Real Estate ETF (VNQ): ETF Research Reports
 
iShares National Muni Bond ETF (MUB): ETF Research Reports
 
IQ US Real Estate Small Cap ETF (ROOF): ETF Research Reports
 
Consumer Discretionary Select Sector SPDR Fund (XLY): ETF Research Reports
 
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