U.S. Consumer Sentiment Drops In May: ETFs That May Suffer

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The rising concerns about the U.S. inflation levels have hurt U.S. consumer sentiments as well. Notably, the University of Michigan’s preliminary consumer sentiment index declined to 82.8 in May from 88.3 last month. The reading lagged even the most pessimistic forecast, per a Bloomberg survey. Consumers seem to be worried about a spike in gas, home and auto prices, per a Bloomberg article.

The measure of current conditions declined to 90.8 in May. Meanwhile, a gauge of consumer expectations fell more than 5 points to 77.6 in early May. Moving on, one-year inflation expectation climbed to 4.6% (the highest reading in a decade). Meanwhile, 43% of the survey participants have responded saying that prices may rise by at least 5%, per the same article.

In this regard, Surveys of Consumers chief economist Richard Curtin said that “Consumer spending will still advance despite higher prices due to pent-up demand and record saving balances.” He also said that “this combination of persistent demand in the face of rising prices creates the potential for an inflationary psychology” (per a Bloomberg article).

How is the U.S. Economy Doing?

The U.S. economy seems to be strongly rebounding from the coronavirus led-slowdown. Several factors like reopening of the economy, accelerated coronavirus vaccine rollout, and solid fiscal support are raising consumer optimism.

Further, the release of strong economic data is consistently fueling the market rally. The latest update on U.S. manufacturing output looks impressive as the plants that were impacted by February's severe weather conditions in the south-central region became operational in April. Per the Fed’s recently-released data, total industrial production rose 0.7% in April. Going on, there was a 0.4%, 0.7%, and 2.6% rise, respectively, in manufacturing output, mining, and utilities production. Total industrial production rose 16.5% year over year in April.

The latest U.S. housing sector data also looks encouraging. Homebuilder confidence index has managed to remain steady despite worries surrounding soaring softwood lumber prices and other material and labor costs.

Additionally, the Fed’s continued dovish stance is increasing the chances of speedy U.S. economic growth recovery from the coronavirus-induced sluggishness. The central bank decided to maintain rates at the near-zero level until 2023 at least. Moreover, the central bank raised its economic growth outlook considering the vaccine and stimulus optimism and it also expects higher inflation this year.

Meanwhile, spooking investors, the latest data highlighted inflation levels rising at the fastest speed since 2008 in April. Notably, the Consumer Price Index rose 4.2% year over year in comparison with the Dow Jones estimate of a 3.6% rise, per a CNBC article. The five-year breakeven inflation rate — which measures expectations of inflation five years outreached its highest since April 2011 on May 10 while the 10-year breakeven inflation rate — a measure of expectations of inflation in 10 years’ time — rose to its highest since March 2013.

Investors are worried that rising inflation may hurt corporate margins and profits. They also fear that the consistent rise in inflation may build pressure on the Federal Reserve to tighten the monetary policy, according to a CNBC article.

Moreover, retail sales in the United States were unchanged in April 2021, falling shy of market expectations of a 1% increase. This follows an upwardly revised 10.7% uptick in March when most households received the first round of stimulus checks.

ETFs That Might Gain

The decline in consumer sentiment is likely to hurt the consumer discretionary sector, which attracts a major portion of consumer spending amid the inflation woes. Below we highlighted the four most popular funds that target the broader consumer discretionary sector.

The Consumer Discretionary Select Sector SPDR Fund (XLY Quick Quote XLY - Free Report)

This is the largest and the most popular product in the consumer discretionary space with AUM of $20.14 billion. It tracks the Consumer Discretionary Select Sector Index. The fund charges 12 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 Quick Quote VCR - Free Report)

This fund currently follows the MSCI US Investable Market Consumer Discretionary 25/50 Index. VCR charges investors 10 bps in annual fees. The product managed $6.10 billion in its asset base and carries a Zacks ETF Rank #2, with a Medium-risk outlook.

First Trust Consumer Discretionary AlphaDEX ETF (FXD Quick Quote FXD - Free Report)

The investment objective of the Fund is to seek investment results that correspond generally to the price and yield, before fees and expenses, of an equity index called the StrataQuant Consumer Discretionary Index. FXD has AUM of $1.79 billion. It charges 63 bps in annual fees and has a Zacks ETF Rank #2 with a Medium risk outlook.

Fidelity MSCI Consumer Discretionary Index ETF (FDIS Quick Quote FDIS - Free Report)

This fund tracks the MSCI USA IMI Consumer Discretionary Index. The product amassed $1.63 billion in its asset base. It charges 8 bps in annual fees from investors and carries a Zacks ETF Rank #2 with a Medium risk outlook.

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