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The world's biggest economy’s growth accelerated in the second quarter, primarily driven by solid consumer spending and higher business investment despite high interest rates. This is especially true as GDP picked up 2.8% annually, higher than 2% growth expected by economists surveyed by Bloomberg and 1.4% in the first quarter.

That said, most of the ETFs will likely benefit from solid GDP numbers. ETFs like Consumer Discretionary Select Sector SPDR Fund (XLY - Free Report), iShares U.S. Industrials ETF (IYJ - Free Report), Invesco Dynamic Leisure and Entertainment ETF (PEJ - Free Report), iShares Russell 2000 ETF (IWM - Free Report) and Financial Select Sector SPDR Fund (XLF - Free Report) are expected to outperform.

Inside GDP Growth
 

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, climbed 2.3% in the second quarter, up from 1.5% growth in the first quarter. Spending on goods such as cars and appliances increased 2.5% after falling 2.3% in the first quarter. The spending was broad-based across services like healthcare, housing and utilities, as well as club memberships, visits to sports centers, parks, theaters and museums, and gambling.

Business investment picked up, led by an 11.6% annual increase in equipment investment and a 3.1% increase in government spending. Growth also ramped up as businesses increased their inventories. Notably, inventories added 0.82 percentage points to GDP growth after being a drag for two straight quarters. On the other hand, imports outpaced exports, which weighed on GDP growth.

Inflation has also eased in the second quarter. The Consumer Price Index rose just 3% year over year in June, down from an annual growth of 3.3% in May. On a monthly basis, the index declined 0.1% from May’s flat reading. This marked the first monthly drop in inflation since 2020 and the slowest annual price gain since March 2021.

However, the outlook for the second half of the year seems cloudy, with the labor market showing signs of a slowdown. The U.S. economy added 206,000 jobs in June, slightly ahead of economist estimates of 200,000 but below the May figure, which was revised lower to 218,000 from 272,000. The unemployment rate rose from 4% to 4.1%, the highest rate since November 2021. Average hourly earnings growth also slowed, rising 0.3% after advancing 0.4% in May. Year over year, wages increased 3.9%, the smallest gain since June 2021, and followed a 4.1% rise in May.

ETFs to Tap
 

Consumer Discretionary Select Sector SPDR Fund

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 offers exposure to the broad consumer discretionary space by tracking the Consumer Discretionary Select Sector Index. Holding 52 securities in its basket, XLY charges 10 bps in annual fees.

Consumer Discretionary Select Sector SPDR Fund has AUM of $20.2 billion and an average daily volume of about 3 million shares. It has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

iShares U.S. Industrials ETF

A rise in business investments will fuel growth in the industrial sector, and thus, VIS looks appealing. Vanguard iShares U.S. Industrials ETF offers exposure to 191 U.S. companies that produce goods used in construction and manufacturing by tracking Russell 1000 Industrials 40 Act 15/22.5 Daily Capped Index. It has key holdings in capital goods and financial services.

iShares U.S. Industrials ETF has an AUM of $1.5 billion and an average daily volume of around 65,000 shares. It charges 40 bps in annual fees and has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.

Invesco Dynamic Leisure and Entertainment ETF

As spending across leisure activities increases, PEJ is set to benefit. Invesco Dynamic Leisure and Entertainment ETF offers exposure to companies that are principally engaged in the design, production or distribution of goods or services in the leisure and entertainment industries. It tracks the Dynamic Leisure and Entertainment Intellidex Index and holds 32 stocks in its basket.

Invesco Dynamic Leisure and Entertainment ETF has amassed $255 million in its asset base and has 0.58% in expense ratio. PEJ trades in a paltry volume of 49,000 shares per day on average and has a Zacks ETF Rank #3 with a High risk outlook.

iShares Russell 2000 ETF

Small-cap stocks generally lead the way higher on improving American economic health as these are closely tied to the U.S. economy and generate most of their revenues from the domestic market. iShares Russell 2000 ETF is the largest and most popular ETF in the small-cap space, with an AUM of $72 billion and an average daily volume of 27 million shares. It holds well-diversified 1,987 stocks in its basket and has key holdings in financials, healthcare, industrials and information technology.

iShares Russell 2000 ETF charges 19 bps in annual fees and has a Zacks ETF Rank #2 with a Medium risk outlook.

Financial Select Sector SPDR Fund

A robust economy can lead to more investments and financial activities. Financial Select Sector SPDR Fund ETF seeks to provide exposure to 71 companies in diversified financial services, insurance, banks, capital markets, mortgage real estate investment trusts, consumer finance, and thrifts and mortgage finance industries. It follows the Financial Select Sector Index, charging investors 9 bps in fees per year.

Financial Select Sector SPDR Fund has AUM of $43 billion and trades in an average daily volume of 35 million shares. It carries a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook.

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