Will ETFs Suffer as US Consumer Sentiment Slips in November?

U.S. consumers have started feeling the pinch of rising inflation levels. The latest disappointing preliminary consumer sentiment readings for early November that have slipped to the lowest level in a decade highlight the same. The University of Michigan’s preliminary consumer sentiment declined to 66.8 in early November from 71.7 last month. The metric lagged the market forecast of 72.4, per the Reuters survey on economists.

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 73.2 in November –the lowest level since 2011 — according to a Bloomberg article. In November, a gauge of consumer expectations slid to 62.8, appearing to be the weakest since 2013.

One-year inflation is expected to rise 4.9% in November (the highest since 2008). The survey’s five-to-10 year inflation outlook remained flat at 2.9% in November, as stated in a Bloomberg article.

In this regard, Richard Curtin, director of the survey, said that “an escalating inflation rate and the growing belief among consumers that no effective policies have yet been developed to reduce the damage from surging inflation.” This was reported in a Bloomberg article. Curtin also said that “One in four consumers cited inflationary reductions in their living standards in November, with lower income and older consumers voicing the greatest impact,” 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 goods have declined to the second-lowest level since the recording of data began in 1978. The metric came in at a reading of 78 (per a Bloomberg article).

Present U.S. Economic Scenario

Investors have started worrying about the hot inflation data releases amid the Fed’s stance of 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 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.

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).

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. The upside in the market has also been driven by the much-anticipated announcements from the Federal Reserve. The central bank has informed about its plan to initiate the tapering of bond purchases “later this month” (according to a CNBC article).

In another positive development, the U.S. jobs report for November seems very 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 8.2% in fourth-quarter 2021 in his latest forecasts on Nov 10 (per the verified sources). This signals an improvement from the previous expectation of 6.6% on Oct 29. 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 XLY

The Consumer Discretionary Select Sector SPDR Fund is the largest and the most popular product in the consumer discretionary space, with AUM of $23.28 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 5.2 million shares (read: ETFs in Trouble as Tesla Takes the Hit of Musk’s Twitter Poll).

Vanguard Consumer Discretionary ETF VCR

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

Vanguard Consumer Discretionary ETF has an AUM of $7.44 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 73,000 shares (read: Consumer Discretionary ETFs to Gain as COVID-19 Situation Improves).

First Trust Consumer Discretionary AlphaDEX Fund FXD

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

First Trust Consumer Discretionary AlphaDEX Fund has AUM of $2.02 billion. FXD charges 63 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 100,000 shares.

Fidelity MSCI Consumer Discretionary Index ETF FDIS

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

Fidelity MSCI Consumer Discretionary Index ETF has amassed $1.78 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 99,000 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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