U.S. Job Growth Momentum Continues: ETFs To Buy

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Includes: DIA, GLD, KRE, PSCT, QQQ, RZV, SPY, UUP, XHS
by: Zacks Funds

After a sturdy reversal in June, the underlying strength in the U.S. labor market was cemented in July. The month saw the addition of 255,000 new jobs, which is way above an 180,000 rise expected by analysts. The unemployment rate remained at 4.9%.

However, the figure was short of the June addition, which was revised up to 292,000 from 287,000 new jobs reported earlier. Investors should note that the paltry 11,000 jobs addition in May was also revised upward to 24,000.

The optimism in the labor market shrugged off doubts (if there was any left after last month's solid job report) about the loss of momentum in the labor market.

In July, professional and business services added 70,000 jobs. There were in fact 550,000 jobs added over the last one year in this sector, as per Trading Economics. Employment in leisure and hospitality was up 45,000 in July. Healthcare and financial activities also generated about 43,000 and 18,000 jobs, respectively, in July.

As per Bloomberg, government agencies recruited 38,000 workers - the highest since September 2014. Local schools benefited the most from this move.

Average hourly earnings nudged up 0.3% to $25.69 in July following a 0.1% wage gain in June. July gains were higher than expected. Wage gains were 2.6% in July on a year-over-year basis. Notably, even a downtrodden month like May saw 0.2% growth in average hourly rate.

The labor force participation rate increased slightly to 62.8%. The broader measure of unemployment and underemployment declined below 10% to 9.7%. Over the past year, average monthly job growth increased to 206,000.

Will the Fed Hike Happen?

Many believe that this firming of the labor market may prompt the Fed to pull its trigger on further policy tightening in the near term. An average of 200,000 monthly job growth definitely indicates strength in the job market. Now the Fed's decision to move ahead with the rate hike depends on global market developments, especially in the post-Brexit world.

Market Impact

No matter what the Fed chooses to do, the market has already started to factor in the solid job report. As a result, the U.S. dollar ETF, PowerShares DB USD Bull ETF (NYSEARCA:UUP), added over 0.5% and also advanced over 0.2% after hours. On the other hand, the gold ETF, SPDR Gold Trust ETF (NYSEARCA:GLD), fell over 1.8% on August 5 on a stronger dollar.

The stock market saw joyous trading on August 5 - the day the job data released. Among the big ETFs, SPY gained about 0.8%, DIA and QQQ added about 1% each in the session.

As far as the bond market is concerned, yields jumped as investors sensed a stronger economy and probably anticipated a Fed rate hike. The yield on the 10-year U.S. Treasury note rose 8 bps to 1.59%. Shorter-term, two-year U.S. Treasury bond yields also rose 8 bps to 0.72%. Even the shorter three-month and six-month Treasury yields increased 2 bps and 4 bps, respectively.

Given this, we have highlighted ETFs that are the direct beneficiaries of job gains and will likely see smooth trading in the days ahead.

ETFs to Consider

UUP in Focus

As stated earlier, UUP should be the biggest beneficiary of the job report. A recovering job market translates into an improving economy, which in turn will attract more capital into the country and lead to the strengthening of the U.S. dollar.

SPDR S&P Regional Banking ETF (NYSEARCA:KRE)

The financial sector benefited from the better-than-expected jobs data and the resultant rise in yields. KRE added over 3.5% on August 5 and also added about 0.4% after hours.

Guggenheim S&P SmallCap 600 Pure Value ETF (NYSEARCA:RZV)

Since small-cap stocks are mostly tied to the domestic economy, a turnaround in the labor market will bode well for the homeland as well as small-cap ETFs. Also, a value focus will help investors who fear turbulence in the stock market if the Fed hikes rate. RZV added 2.2% on August 5.

SPDR S&P Health Care Services ETF (NYSEARCA:XHS)

With strong job growth seen in the healthcare sector, a look at this ETF is warranted. XHS gained 1.3% on August 5.

PowerShares S&P SmallCap Information Technology Portfolio ETF (NASDAQ:PSCT)

Persistent wage gains and notable job additions in computer systems design and related services may boost this small-cap technology ETF. PSCT was up over 1.9% on August 5.

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