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US Q2 GDP Growth Slows But Beats Estimates: ETF Areas to Win

Sanghamitra Saha

The U.S. economy grew an annualized 2.1% in the second quarter of 2019, breezing past expectations of 1.8%, following a 3.1% uptick in the previous three-month period.Faster increases in household consumption and government spending led to the beat, while softer exports and a smaller inventory build contributed negatively to growth. 

Needless to say, tariffs and a global slowdown dented the U.S. economic growth to some extent. Investors should note that Q2 GDP growth marked the weakest increase since Q1 of 2017 when President Donald Trump took office, per CNBC.

Consumer spending, which accounts for more than two-thirds of U.S. GDP, rose 4.3% (which was the best performance since the fourth quarter of 2017). Government consumption expenditures and gross investment increased 5%, the fastest clip since Q2 of 2009. However, business investment slumped 5.5%. That said, the GDP scorecard shows that though there are pockets of weakness, the U.S. economy is better positioned than most developed economies.

The labor market is steady as well. “The recession talk was always overstated,” said Michael Arone, chief investment strategist at State Street Global Advisors, as quoted on CNBC. “The economic data continue to suggest that the economy isn’t near recession, at least in the next year or so,” per State Street Global Advisors.

Investors should also note that the ongoing earnings season came in stronger than expected. Analysts believe that the economy, though decelerating, remains hardy enough to deliver decent corporate earnings.

Meanwhile, the broader market is anticipating a rate cut from the Fed in the coming days thanks to the global growth slowdown. However, a 50-basis point reduction in Fed rate dropped to 19% after the GDP report from about 24% projected earlier. Market participants are betting big on a 25-bp rate cut in the July meeting.

Against this backdrop, we highlight a few ETF areas that could fetch investors some solid returns.

Consumer ETFs

Upbeat consumer spending was the sweet spot in the Q2 U.S. GDP growth report. Consumer Discretionary Select Sector SPDR ETF XLY and iShares Evolved U.S. Consumer Staples ETF IECS should be in a beneficial position. Both funds added 0.5% and 1.6% on Jul 26.

Muni Bond ETFs

State and local spending rose 3.2%, after a 3.3% uptick in the first quarter. State and local government spending contributed about 0.35 percentage points to the economy. Federal government spending accounted for about 0.51 percentage points to the GDP growth.

Investors can tap this uptick in government spending via investing in muni bond ETFs like Invesco National AMT-Free Municipal Bond ETF PZA. The fund comprises U.S. dollar-denominated, investment grade, tax-exempt debt publicly issued by U.S. states and territories, or their political subdivisions. The fund yields 2.96% annually. It was up 0.06% on Jul 26.

Growth ETFs

A moderate pickup in broad-based economic growth as well as an accommodative monetary policy should bode well for growth stocks across all spectrums. This makes sense to consider the fund Clearbridge All Cap Growth ETF CACG. The fund was up 1.3% on Jul 26 (read: 5 Unbeatable ETF Strategies for 2nd Half).

Small-Cap ETFs

Since small-cap stocks benefit greatly from an uptick in the domestic economy, related ETFs likeiShares Russell 2000 ETF IWM should gain ahead. The fund added about 1.2% on Jul 26 (read: Small-Cap ETFs Underperforming: Be Choosy With 5 Top Picks).

Communication ETFs

Accommodative polices across the globe and upbeat earnings from some big technology companies are tailwinds to communication ETFs. Investors should also note that services consumption growth accelerated 2.5% from 1% in the previous period. Assuming consumers’ greater inclination toward consuming communication services, we quote S&P 500 Communication Sector SPDR ETF XLC as a buy (read: Alphabet Soars on Q2 Results: ETFs to Benefit).

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Consumer Discretionary Select Sector SPDR Fund (XLY): ETF Research Reports
 
iShares Russell 2000 ETF (IWM): ETF Research Reports
 
Invesco National AMT-Free Municipal Bond ETF (PZA): ETF Research Reports
 
ClearBridge All Cap Growth ETF (CACG): ETF Research Reports
 
iShares Evolved U.S. Consumer Staples ETF (IECS): ETF Research Reports
 
Communication Services Select Sector SPDR Fund (XLC): ETF Research Reports
 
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