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The American economy expanded faster than expected in the fourth quarter, with GDP rising 2.9% annually versus 2.6% expectation. Though the economy has been resilient, the pace of momentum has slowed in recent months due to stubborn inflation, rising interest rates, and battered financial markets. The GDP growth marks a slowdown from the 3.2% advancement in the third quarter.

With this, the U.S. economy expanded 2.1% annually in 2022 but is down from an annual growth of 5.9% recorded in 2021— the fastest rate since 1984.

That said, most of the ETFs will likely benefit on solid 2022 GDP numbers. ETFs like Consumer Discretionary Select Sector SPDR Fund (XLY - Free Report), iShares U.S. Transportation ETF (IYT - Free Report), Materials Select Sector SPDR (XLB - Free Report), and Vanguard Mid-Cap ETF (VO - Free Report), are expected to outperform.

Current Trends

Retail sales have weakened sharply over the last two months and manufacturing looks to have joined the housing market in a recession. Though mortgage rates have been declining in recent weeks, they remained well above 6%, much higher than the year ago. This is weighing on both new home construction and the sale of existing homes. Meanwhile, business sentiment continues to sour, with spending losing some luster in the fourth quarter.

The Fed last year raised interest rates by 425 bps from near zero to a 4.25-4.50% range, the highest since late 2007. The increase in interest rates has made borrowing expensive, pushed up the cost of buying a new car or house, increased the cost of carrying credit card debt and thus slowed down economic growth.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 2.1% in the fourth quarter but slower than a 2.3% increase in the third quarter. The growth came on the back of strong labor market resilience as well as excess savings accumulated during the COVID-19 pandemic. Notably, the unemployment rate is hovering at a multi-decade low of 3.5%.

Many forecasters think the economy is likely to slide into a recession this year. Per the latest survey, the U.S. economy has a 64% chance of contracting in 2023. However, the economy might avoid recession if the activity continues to grow this year.

ETFs to Tap

Consumer Discretionary Select Sector SPDR Fund (XLY)

Solid economic growth will have a positive impact on the consumer discretionary sector, which attracts a major portion of consumer spending. As such, investors could tap the encouraging trend in the basket form through the ultra-popular Consumer Discretionary Select Sector SPDR Fund. It has AUM of $13.8 billion and an average daily volume of about 4.3 million shares.

Consumer Discretionary Select Sector SPDR Fund offers exposure to the broad consumer discretionary space by tracking the Consumer Discretionary Select Sector Index. Holding 56 securities in its basket, XLY charges 10 bps in annual fees and has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.

iShares U.S. Transportation ETF (IYT)

Travel will likely surge as the economy continues to gain steam and consumer confidence keeps on growing. iShares U.S. Transportation ETF tracks the S&P Transportation Select Industry FMC Capped Index, giving investors exposure to a small basket of 49 securities. Within the transportation sector, air freight and logistics, and railroads take the top two spots with 30.6% and 29.1% share, respectively, while trucking (22.5%) and airlines (16.3%) round off the next two.

iShares U.S. Transportation ETF has $769.8 million in AUM and has a good trading volume of around 165,000 shares a day. It charges 39 bps in fees per year and has a Zacks ETF Rank #3 (Hold) with a High risk outlook.

Materials Select Sector SPDR (XLB)

The Materials sector is riding higher on higher demand for materials and will likely continue its trend as the economy gains steam. Materials Select Sector SPDR is the most-popular material ETF that follows the Materials Select Sector Index. It manages about $6.1 billion in its asset base and trades in volumes as heavy as around 4.2 million shares. Materials Select Sector SPDR holds about 29 securities in its basket and charges 10 bps in fees per year from its investors.

In terms of industrial exposure, chemicals dominates the portfolio with a 67% share, while metals & mining and containers & packaging round off the top three positions. The product has a Zacks ETF Rank #2 with a Medium risk outlook.

Vanguard Mid-Cap ETF (VO)

Mid-cap stocks will likely benefit given the improving economic health and worries over recession fears. This is because mid caps offer the best of both worlds, simultaneously allowing growth like the small caps and stability like the large caps in a portfolio. Vanguard Mid-Cap ETF, which tracks the CRSP US Mid Cap Index, appears to be an excellent choice. It has key holdings in industrials, technology, financials, consumer discretionary and healthcare.

Vanguard Mid-Cap ETF has amassed $53.1 billion in its asset base while trading in solid volume of around 686,000 shares. It charges 4 bps in fees per year and has a Zacks ETF Rank #2 with a Medium risk outlook.

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