In the last decade, student debt has become one of the largest forms of consumer borrowing with about 44 million borrowers collectively owing approximately $1.7 trillion. Between 2019 and 2023, average student loan debt grew by 3.6%, while the U.S. economy shrank by 3.4%.

Over the past two decades, student debt in the United States has doubled, surpassing both credit card debt and auto loans, only eclipsed by home mortgage debt.

Consumer Spending to Take a Hit

According to U.S. Bank, consumer spending represents around 66% of total economic activity in the United States, with personal consumption accounting for more than 68% of the GDP in second-quarter 2023. With college graduates already worried about entering a weak U.S. job market, consumer spending stands to take a huge beating as debt payments become due from Oct 1.

As per Yahoo Finance, according to a survey of more than 600 U.S. consumers with a student debt obligation, about 90% expressed at least some level of concern about being able to cover all their monthly expenses. According to Jefferies, as quoted on Yahoo Finance, with students planning to curb their spending levels, U.S. retailers could see losing considerable business for the remainder of 2023.

Upcoming debt repayments are forecast to curb consumer spending by around $9 billion a month to $70 billion a year, before accounting for the surge in oil prices, as per Mint.

ETFs Categories in Focus

With the economy already dealing with fears of a government shutdown,persistently high inflation levels in the country and the possibility that the Fed will remain hawkish for a longer duration cause several headwinds for the retail and the broader consumer discretionary sector, as students burdened with debt look to curb their expenses on non-essential items.

Below, we highlight a few ETF areas that could be affected by the loan payments. However, it is important to note that there may be other headwinds already affecting the fund mentioned.

Retail ETFs

According to a Wall Street Journal report, as quoted on Nasdaq, repayment of student debt is estimated to cut consumer spending by around $100 billion over the coming year. With consumer looking to accommodate debt payments in their budget, discretionary spending by them is expected to be curtailed, affecting retail ETFs adversely.

However, retailers like Walmart (WMT) and Costco (COST) that cater to more economical borrowers stand to benefit as consumers look for cheaper alternatives. Consumer Staples Select Sector SPDR Fund (XLP) has an exposure of 10.74% and 9.74% to COST and WMT, respectively.

Investors can keep a watch on funds like SPDR S&P Retail ETF (XRT) and VanEck Retail ETF (RTH) in the coming days. These funds have lost 7.78% and 5.77%, respectively, over the past month.

With Millennials accounting for about 30.26% of the total debt amount, according to Education Data Initiative, investors can also observe Millennial Consumer ETF (MILN) . MILN seeks to track the performance of the Indxx Millennials Thematic Index which measures the performance of U.S.-listed companies targeting the Millennial generation (born between 1980 and 2000).

Online Retail ETFs

After Covid, online spending has become increasingly more common among consumers. As quoted on Retail Brew, as of Q2 2023, e-commerce spending has rebounded to its highest level in three years, reaching 15.4%, according to data from the Federal Reserve Bank of St. Louis.

As consumers are poised to keep a tight lid on their discretionary spending, online retail funds are expected to be affected by the curb in consumption levels. With credit card debt already reaching the mark of $1 trillion, additional debt payments are headwinds for the fund.

Funds like Amplify Online Retail ETF (IBUY) , ProShares Online Retail ETF (ONLN) and First Trust S-Network E-Commerce ETF (ISHP) are expected to be affected. These funds have fallen about 3.07%, 2.38% and 0.61% since the start of October (as of Oct 5).

Restaurant and Miscellaneous ETFs

As per Yahoo Finance, in a Jefferies survey, more than 50% of respondents plan to decrease spending on clothing and accessories, followed by restaurants and footwear as the second and third-most mentioned categories for spending cuts.

AdvisorShares Restaurant ETF (EATZ) , Invesco Food & Beverage ETF (PBJ) and First Trust Nasdaq Food & Beverage ETF (FTXG) have lost 1.70%, 2.58% and 4.17%, respectively, since the start of October (as of Oct 5).

Discretionary spending and big spending by consumers burdened with student debt are poised to take a beating. Hence, travel ETFs like ALPS Global Travel Beneficiaries ETF (JRNY), ETFMG Travel Tech ETF (AWAY) and Defiance Hotel Airline and Cruise ETF (CRUZ) have lost about 0.76%, 3.50% and 1.06%, respectively since the start of October (as of Oct 5).

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