Q1 GDP Growth Revised Upward: ETFs To Benefit

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Includes: ITB, RGI, RTH, XLY
by: Zacks Funds

The U.S. economy has been growing at a modest pace rather than the initially thought of slowdown. This is especially true given that U.S. GDP growth has almost doubled from the initial reading of 0.7% last month to 1.2% for the first quarter, per the second reading of the Bureau of Economic Analysis.

The revised number reflects an improvement from what was the weakest first-quarter growth in three years. Yet, it still represents the country's worst quarter of growth since the start of 2016 and is well below the fourth-quarter growth of 2.1%.

Reasons for Upgrade

The upgrade was the result of strength in consumer spending and increase in business and housing spending. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased 0.6% in the first quarter, up from 0.3% initially reported. This is the slowest pace of increase since the fourth quarter of 2009 and follows the fourth quarter's robust 3.5% growth rate.

Nonresidential fixed investment, or spending on equipment, structures and intellectual property, rose 11.4% compared with the initial estimate of 9.4% and the fourth-quarter anemic growth of 0.9%. In particular, business spending on structures, such as mine shafts and oil wells, jumped 28.4% in the first quarter. Meanwhile, residential spending remained strong, marking a 13.8% increase from 13.7% initially reported. This, incidentally, is the fastest pace of increase that residential spending has seen in nearly two years.

The trend is likely to continue with speedy growth in the second quarter. Consumer spending will continue to expand with solid job and wage growth, and business spending will accelerate further, especially for energy-related industries. Notably, the unemployment rate fell to 4.4%, the lowest level in more than a decade. U.S. retail sales rebounded to grow 0.4% in April after two months of sluggish sales, signaling a step-up in spending by Americans in the second quarter.

Additionally, the latest consumer sentiment, as measured by the University of Michigan, reflects an improved outlook on wages and acceleration in spending.

Given better-than-expected economic conditions, investors could ride this growth with the help of the following ETFs:

iShares U.S. Home Construction ETF (BATS:ITB)

This fund provides a pure play to home construction stocks by tracking the Dow Jones U.S. Select Home Construction Index. It holds a basket of 44 stocks, with double-digit allocation going to the top two firms. Other firms hold not more than 8.5% of assets. The product has amassed $1.5 billion in its asset base and trades in heavy volume of around 2.5 million shares a day on average. It charges 44 bps in annual fees and has gained 18.7% so far this year. The fund has a Zacks ETF Rank of 1 or "Strong Buy" rating with a High risk outlook.

Consumer Discretionary Select Sector SPDR ETF (NYSEARCA:XLY)

This is the largest and the most popular product in the consumer discretionary space with AUM of $12.7 billion and average daily volume of over 4.5 million shares. It tracks the Consumer Discretionary Select Sector Index and holds 87 securities, with higher concentration on the top firm at 15.3%. Other firms make up for a nice mix, with each holding less than 7.5% of assets. From a sector look, media takes the top spot with 25% of assets, followed by internet & direct marketing retail (22.4%), specialty retail (19%), and hotels and restaurants (14%). The fund charges 14 bps in fees per year and has gained 11.8% in the year-to-date time frame. It has a Zacks ETF Rank of 3 or "Hold" rating with a Medium risk outlook.

Guggenheim S&P Equal Weight Industrial ETF (NYSE:RGI)

This ETF targets the industrial sector and offers equal-weight exposure to 67 stocks by tracking the S&P 500 Equal Weight Industrials Index. From an industrial look, the fund is tilted toward machinery, which accounts for 21.7% share in the basket, while aerospace & defense and road & rail round off to the next two spots at 17.1% and 8.9%, respectively. The product has accumulated $185.9 million in its asset base, while volume is light at around 25,000 shares, indicating a wide bid/ask spread. The fund charges 40 bps in annual fees and has added 7.3% so far this year. It has a Zacks ETF Rank of 2 or "Buy" rating with a Medium risk outlook.

VanEck Vectors Retail ETF (NYSEARCA:RTH)

This fund provides exposure to the 26 largest retail firms by tracking the MVIS US Listed Retail 25 Index. It is highly concentrated on the top firm at 17.1%, while other firms hold less than 8.1% share. The ETF has a certain tilt toward specialty retail, which accounts for 27% share, while internet & direct marketing (24%), hypermarkets (11%), healthcare services (10%), and drug stores (9%) round off the top five. The product has amassed $63.8 million in its asset base and charges 35 bps in annual fees. Volume is paltry, exchanging nearly 20,000 shares a day on average. RTH has been up 9.1% in the same period and has a Zacks ETF Rank of 1 with a Medium risk outlook.

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