US Consumer Sentiment Stays Weak in March: Will ETFs Suffer?

U.S. consumers are worried about the ongoing Russia-Ukraine conflict and its implications on the already high inflation levels. The surge in gasoline prices to record high levels hurt the consumer sentiment. The latest disappointing preliminary consumer sentiment readings for early March that have slipped to the lowest level in about 11 years highlight the same.

The University of Michigan’s preliminary consumer sentiment dropped to 59.7 in early March from a final reading of 62.8 last month. The metric, which witnessed the lowest level since September 2011, lagged the market forecast of the index declining to 61.4, per the Reuters survey on economists.

The disappointing consumer sentiment reading might affect the consumer discretionary sector, which attracts a major portion of consumer spending amid the rising inflation levels. Certain ETFs that can feel the impact are The Consumer Discretionary Select Sector SPDR Fund (XLY), Vanguard Consumer Discretionary ETF (VCR), First Trust Consumer Discretionary AlphaDEX Fund (FXD) and Fidelity MSCI Consumer Discretionary Index ETF (FDIS).

The measure of current economic conditions dipped to 67.8 in March from 68.2 last month. In March, a gauge of consumer expectations slid to 54.4 from a reading of 59.4 in February.

One-year inflation is expected to rise to 5.4% in March (the highest since 1981) from 4.9% in the previous month (per a Reuters article). The survey's five-to-10-year inflation outlook remained at 3% in March.

The latest decline in U.S. consumer sentiment levels is largely due to deteriorating personal financial scenarios from surging inflation levels along with declining confidence in the government's economic policies. The Russia-Ukraine war escalated the gas and grocery item prices further, adding to consumers’ woes.

Present U.S. Economic Scenario

The Russia-Ukraine crisis, inflation at a 40-year high and the Fed’s hawkish outlook for the interest rate are persistently unsettling investors. As the Russia-Ukraine tension continues, rising commodity prices and fears of further disruptions in global supply-chain distributions might stoke higher inflation. Also, as the Federal Reserve took an aggressive approach to increasing the rates, market participants are worrying about the U.S. economy slipping into stagflation due to high interest rates and steep inflation.

Wall Street is also constantly bearing the brunt of the existing market ambiguity. The Dow Jones Industrial Average has been already down 6.2% so far in 2022, troubled by a hawkish Fed and surging inflation levels at the start of the year. The other two broad market indices, namely the S&P 500 and the Nasdaq composite have also been down 8.3% and 13.7%, respectively.

In order to control hot inflation readings, the Federal Reserve approved a 0.25 percentage point rate hike (the first increase since December 2018) on Mar 16. Following this hike, the benchmark interest rates will fall into a 0.25-0.5% range. In fact, the Federal Reserve announced plans to increase interest rates six times this year, bringing to a consensus funds rate of 1.9% by 2022 end (per a CNBC article).

The U.S. economic fundamentals have been staying strong to date. Despite disappointing U.S. consumer sentiment levels, consumer spending remained robust. In fact, a recent report highlighted that inflation-adjusted expenditure surged the maximum in January in 10 months (per a BloombergQuint article). Moreover, the labor market continues to improve. According to the Bureau of Labor Statistics, the U.S. economy added 678,000 jobs in February, beating economists’ expectations of 440,000 (per Dow Jones). The unemployment rate also dropped to 3.8%.

The Institute of Supply Management (ISM) reported that its manufacturing index for February rose to 58.6% from 57.7% in January, beating the consensus estimate of 57.7%. This marked the 21st successive month of growth for the U.S. manufacturing industry.

ETFs That Might Suffer

Here we discuss in detail the four most popular funds that target the broader consumer discretionary sector (see all Consumer Discretionary ETFs):

The Consumer Discretionary Select Sector SPDR Fund XLY

The Consumer Discretionary Select Sector SPDR Fund is the largest and the most popular product in the consumer discretionary space, with AUM of $16.88 billion. XLY tracks the Consumer Discretionary Select Sector Index.

The Consumer Discretionary Select Sector SPDR Fund charges an expense ratio of 0.10%. XLY carries a Zacks ETF Rank #2 (Buy), with a Medium-risk outlook. Also, The Consumer Discretionary Select Sector SPDR Fund trades in a three-month average volume of 11.3 million shares (read: Top 5 Consumer Discretionary Stocks Despite Recent Weakness).

Vanguard Consumer Discretionary ETF VCR

Vanguard Consumer Discretionary ETF currently follows the MSCI US Investable Market Consumer Discretionary 25/50 Index.

Vanguard Consumer Discretionary ETF has an AUM of $5.53 billion and charges an expense ratio of 0.10%. VCR carries a Zacks ETF Rank #2, with a Medium-risk outlook. Also, Vanguard Consumer Discretionary ETF trades in a three-month average volume of about 168,000 shares (read: ETFs to Win & Lose on the Likely First Rate-Hike Since 2008).

First Trust Consumer Discretionary AlphaDEX Fund FXD

First Trust Consumer Discretionary AlphaDEX Fund tracks the StrataQuant Consumer Discretionary Index, which employs the AlphaDEX stock-selection methodology to select stocks from the Russell 1000 Index.

First Trust Consumer Discretionary AlphaDEX Fund has AUM of $1.50 billion. FXD charges 0.61% of annual fees and has a Zacks ETF Rank #3 (Hold), with a Medium-risk outlook. Also, First Trust Consumer Discretionary AlphaDEX Fund trades in a three-month average volume of about 285,000 shares.

Fidelity MSCI Consumer Discretionary Index ETF FDIS

Fidelity MSCI Consumer Discretionary Index ETF tracks the MSCI USA IMI Consumer Discretionary Index.

Fidelity MSCI Consumer Discretionary Index ETF amassed $1.32 billion in its asset base. FDIS charges 8 basis points as annual fees from investors and carries a Zacks ETF Rank #2, with a Medium-risk outlook. Fidelity MSCI Consumer Discretionary Index ETF trades in a three-month average volume of about 244,000 shares.

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Consumer Discretionary Select Sector SPDR ETF (XLY): ETF Research Reports
 
Vanguard Consumer Discretionary ETF (VCR): ETF Research Reports
 
Fidelity MSCI Consumer Discretionary Index ETF (FDIS): ETF Research Reports
 
First Trust Consumer Discretionary AlphaDEX ETF (FXD): ETF Research Reports
 
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