ETFs At Risk As U.S. Consumer Confidence Takes A Hit In July

The rising number of coronavirus cases in the United States took a toll on consumer confidence in July, as worries about job prospects and business conditions surfaced. The Conference Board's measure of consumer confidence index stands at 92.6, comparing unfavorably with June’s reading of 98.3. Moreover, July’s reading lagged the consensus estimate of 94.5, per a Reuters’ poll.

The Present Situation Index, which gauges consumer views on current business and labor market conditions, rose to 94.2 in July, from 86.7 in the previous month. Meanwhile, the Expectations Index, which is a measure of consumers’ short-term (for the next six months) outlook for income, business and labor market conditions, declined from 106.1 in the previous month, to 91.5 in July.

It is believed that, given the uncertainty surrounding the coronavirus pandemic, consumer spending might not rise in the near term, at least. Also, the second half of 2020 is expected to keep facing the brunt of the coronavirus pandemic as the second wave of the outbreak is gathering steam.

Commenting on the consumer confidence data, Lynn Franco, senior director of economic indicators at The Conference Board, said that “looking ahead, consumers have grown less optimistic about the short-term outlook for the economy and labor market and remain subdued about their financial prospects. Such uncertainty about the short-term future does not bode well for the recovery, nor for consumer spending.”

Current U.S. Economic Scenario

The aggravating coronavirus cases seems to have spooked consumers in July, as the total number of cases have crossed 4.4 million, with at least 150,000 deaths, per a CNN report. Also, the U.S. economy’s second-quarter GDP’s most devastating plunge of 32.9% on an annualized basis, per the Commerce Department’s first reading on the data, has dented investor optimism (per a CNBC article). The downside was largely believed to be due to declining personal consumption, exports, inventories, investment and spending by state and local governments.

Going on, looking at the aggravating coronavirus situation, states like California, Texas, Florida, Los Angeles, San Diego, and Oregon have halted or rolled back the reopening process. Going by a CNN report, more than 150 influential U.S. medical experts, scientists, teachers, nurses, and others have taken this initiative and signed a letter requesting political authorities to shut down the country once again in order to combat the pandemic. 

It has been observed that the coronavirus outbreak has caused a substantial impact by slowing down economic activities, as governments had to shut down commerce and impose social-distancing measures in an effort to contain the spread of the virus. Furthermore, the halting or rolling back of the economic reopening process may hurt investor sentiments and optimism around economic recovery in the near term.

ETFs That Might Suffer

The weakening consumer confidence can affect the consumer discretionary sector, which attracts a major portion of consumer spending. Below, we have highlighted the four most popular ones that target the broader consumer discretionary sector (see all Consumer Discretionary ETFs):

The Consumer Discretionary Select Sector SPDR Fund (XLY)

This is the largest and most popular product in the consumer discretionary space, with AUM of $14.50 billion. It tracks the Consumer Discretionary Select Sector Index, holding 61 securities in its basket. The fund charges 13 basis points (bps) in fees per year and carries a Zacks ETF Rank #2 (Buy), with a Medium-risk outlook.

Vanguard Consumer Discretionary ETF (VCR)

This fund currently follows the MSCI US Investable Market Consumer Discretionary 25/50 Index and holds 293 stocks in its basket. VCR charges investors 10 bps in annual fees. The product has managed $3.50 billion in its asset base and carries a Zacks ETF Rank #3 (Hold), with a Medium-risk outlook.

First Trust Consumer Discretionary AlphaDEX Fund (FXD)

This fund tracks the StrataQuant Consumer Discretionary Index, which employs the AlphaDEX stock-selection methodology to select stocks from the Russell 1000 Index. This approach results in a basket of 119 stocks. FXD has AUM of $953.8 million. It charges 64 bps in annual fees and has a Zacks ETF Rank #3, with a Medium-risk outlook.

Fidelity MSCI Consumer Discretionary Index ETF (FDIS)

This fund tracks the MSCI USA IMI Consumer Discretionary Index, holding 243 stocks in its basket. The product has amassed $875.5 million in its asset base. It charges 8 bps in annual fees from investors and carries a Zacks ETF Rank #3, with a Medium-risk outlook.