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ETFs to Suffer as US Consumer Sentiment Slips to 10-Year-Low Mark

U.S. consumers are clearly worried about rising prices, as reflected by the surging inflation levels. The latest consumer sentiment readings for November look very disappointing as the metric has slipped to the lowest level in a decade compared to the previous month. The University of Michigan’s final consumer sentiment declined to 67.4 during November from 71.7 in October. However, the reading still compared favorably with the preliminary estimate of 66.8 in early November.

The disappointing consumer sentiment reading might affect the consumer discretionary sector, which attracts a major portion of consumer spending amid rising inflation levels. Certain ETFs that can feel the impact are The Consumer Discretionary Select Sector SPDR Fund XLY, Vanguard Consumer Discretionary ETF VCR, First Trust Consumer Discretionary AlphaDEX Fund FXD and Fidelity MSCI Consumer Discretionary Index ETF FDIS.

Going on, the measure of current economic conditions dipped to 73.6 in November from 77.7 in October. In November, a gauge of consumer expectations slid to 63.5, appearing weak compared to October’s reading of 67.9.

One-year inflation is expected to rise 4.9% in November (the highest since 2008). The survey's five-to-10-year inflation outlook rose to 3% in November, as stated in a Bloomberg article.

In this regard, Richard Curtin, director of the survey, said that “While pandemic induced supply-line shortages were the precipitating cause, the roots of inflation have grown and spread more broadly across the economy.” This was reported in a BloombergQuint article. Curtin also said that “Rather than gradually easing along with diminished shortages, complaints about falling living standards doubled in the past six months,” per the same article as mentioned above.

Consumers seem disturbed about the rising prices of homes, vehicles, food and household durables. The Michigan survey has also highlighted that the buying conditions for household durable goods have declined to the second-lowest level since the recording of data began in 1978.

Current U.S. Economic Scenario

Investors have started worrying about the hot inflation data releases amid the Fed calling inflation levels ‘transitory’. Per the latest Labor Department report, the Consumer Price Index (CPI) in October rose 6.2% year over year compared to the Dow Jones estimate of a 5.9% rise, per a CNBC article. The metric came in at the highest level since December 1990 and it covers a basket of products ranging from gasoline and health care to groceries and rents. It also increased 0.9% for the month, surpassing the 0.6% Dow Jones estimate. The soaring food, used vehicles and energy prices might be primarily responsible for the rising inflation levels.

The Federal Reserve’s more preferred inflation gauge, core personal consumption expenditures, rose 4.1% year over year for October, on par with the estimates (per a CNBC article).

According to the Federal Reserve, a major part of the inflation has been triggered by the pandemic-driven supply-demand imbalance, which might get resolved in a few months (per a CNBC article).

The resurging coronavirus cases in the European Union can be a concern as travel restrictions are being lifted globally and economies are reopening. Moreover, the variant, called B.1.1.529, detected in South Africawith numerous mutations to the spike protein, is also worrying investors (as stated in a CNBC article).

However, the impressive third-quarter earnings results have been keeping investors busy. The earnings results have also eased investors' worries surrounding the rising supply-chain disturbances eroding corporate profit margins.

In another positive development, the U.S. jobs report for November seems impressive. The nonfarm payrolls rose by 531,000 in October, surpassing the estimate of 450,000, per a CNBC article. Also, beating expectations, the unemployment rate declined to 4.6%, hitting a new pandemic low level (according to a CNBC article).

Wall Street has another reason to cheer as the U.S. House of Representatives has passed the more than $1-trillion infrastructure bill on Nov 5. The bill has now moved to President Biden for his signature. The legislation was approved in a 228-206 vote.

Going on, the Atlanta Fed stated that the U.S. economy will grow 8.6% (revised upwards from 8.2%) in fourth-quarter 2021 in his latest forecasts. Heading into the holiday season, given the reopening of domestic and international borders for traveling, we are enthusiastic about U.S. economic growth.

ETFs That Might Suffer

Here we discuss in detail the four most popular funds that target the broader consumer discretionary sector (see all Consumer Discretionary ETFs):

The Consumer Discretionary Select Sector SPDR Fund

The Consumer Discretionary Select Sector SPDR Fund is the largest and the most popular product in the consumer discretionary space, with AUM of $23.99 billion. XLY tracks the Consumer Discretionary Select Sector Index.

The Consumer Discretionary Select Sector SPDR Fund charges an expense ratio of 0.12%. XLY carries a Zacks ETF Rank #2 (Buy), with a Medium-risk outlook. Also, The Consumer Discretionary Select Sector SPDR Fund trades in three-month average volume of about 5.7 million shares (read: Home Depot Rises Post Q3 Earnings: ETFs to Buy).

Vanguard Consumer Discretionary ETF

Vanguard Consumer Discretionary ETF currently follows the MSCI US Investable Market Consumer Discretionary 25/50 Index.

Vanguard Consumer Discretionary ETF has an AUM of $7.65 billion and charges an expense ratio of 0.10%. VCR carries a Zacks ETF Rank #1 (Strong Buy), with a Medium-risk outlook. Also, Vanguard Consumer Discretionary ETF trades in three-month average volume of about 104,000 shares (read: Will ETFs Win During Thanksgiving Week Amid Virus Fears?).

First Trust Consumer Discretionary AlphaDEX Fund 

First Trust Consumer Discretionary AlphaDEX Fund tracks the StrataQuant Consumer Discretionary Index, employing the AlphaDEX stock-selection methodology to select stocks from the Russell 1000 Index.

First Trust Consumer Discretionary AlphaDEX Fund has AUM of $2.01 billion. FXD charges 63 basis points (bps) in annual fees and has a Zacks ETF Rank #3 (Hold), with a Medium-risk outlook. Also, First Trust Consumer Discretionary AlphaDEX Fund trades in three-month average volume of about 97,000 shares.

Fidelity MSCI Consumer Discretionary Index ETF

Fidelity MSCI Consumer Discretionary Index ETF tracks the MSCI USA IMI Consumer Discretionary Index.

Fidelity MSCI Consumer Discretionary Index ETF has amassed $1.83 billion in its asset base. FDIS charges 8 bps in annual fees from investors and carries a Zacks ETF Rank #2, with a Medium-risk outlook. Fidelity MSCI Consumer Discretionary Index ETF trades in three-month average volume of about 97,000 shares.


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Consumer Discretionary Select Sector SPDR ETF (XLY): ETF Research Reports
 
Vanguard Consumer Discretionary ETF (VCR): ETF Research Reports
 
Fidelity MSCI Consumer Discretionary Index ETF (FDIS): ETF Research Reports
 
First Trust Consumer Discretionary AlphaDEX ETF (FXD): ETF Research Reports
 
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