5 Top-Ranked ETFs to Ride on a Booming Economy

Sweta Killa
·5 min read

The American economy has been booming, pushing the U.S. stock indices to new highs. This is especially true as U.S. GDP grew 6.4% annually in the first quarter, representing the second-strongest increase since 2003.

The growth was broad based across personal consumption, fixed residential and nonresidential investment, government spending and business investment, and housing though a decline in inventories and exports took some sheen away (read: ETF Areas to Win on Smashing Q1 U.S. GDP Growth).

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, climbed 10.7% in the quarter after a 2.3% increase in the fourth quarter of last year. The boost came from spending money on cars, food and beverages, and services like restaurants and accommodations. Rapid vaccinations, faster job growth, round of stimulus and a reopening economy have been powering activities across all sectors and categories, resulting in increased consumer spending.

Meanwhile, government spending jumped 6.3% — the fastest since 2002 and a reflection of federal stimulus — while annualized non-defense outlays climbed the most since 1963. Non-residential investment rose an annualized 9.9%, driven by equipment and intellectual property, while residential investment increased at a 10.8% rate.

Per the latest data, the U.S. vaccination campaign has now inoculated a significant number of people. More than 43% of the population has received at least one dose, and one-third Americans are fully vaccinated. Although about 14 million have returned to their jobs since the pandemic, the country is still 8.5 million jobs below February 2020. The unemployment rate tumbled to 6% from a high of 14.7% but is well above the 3.5% reached in February 2020.

President Joe Biden’s two additional spending plans — one focused on infrastructure and the other on families — would infuse trillions more dollars into the economy over the next decade that would keep the growth intact. In fact, many economists expect the economy to fully recover from the recession in late 2023. They forecast U.S. growth to top 7% this year, which would be the fastest since 1984, following the worst performance in 74 years when the economy contracted 3.5% in 2020. Per the IMF projection, the United States is expected to become the engine of the global economy this year with the strongest growth of 6.4% in decades (read: 5 ETFs That Skyrocketed During Biden's 100 Days in Office).

However, massive stimulus and government funding is expected to spark inflationary concerns but the Fed expects higher inflation to be temporary.

While most of the ETFs will likely benefit on astounding Q1 GDP numbers, we have highlighted five funds with a solid Zacks ETF Rank #1 (Strong Buy) or 2 (Buy) that are expected to outperform in the days ahead.

Vanguard Growth ETF VUG

Growth stocks outperform during a trending market (a market characterized by a prolonged uptrend). These refer to high-quality stocks that are likely to witness revenue and earnings increase at a faster rate than the industry average. As such, these stocks harness their momentum in earnings to create a positive bias in the market, resulting in rocketing share prices. VUG having a Zacks ETF Rank #1 seems a good bet. With AUM of $75.2 billion, this fund follows the CRSP US Large Cap Growth Index. It holds 276 stocks in its basket and charges 4 bps in annual fees. The fund trades in an average daily volume of 888,000 shares (read: ETF Strategies to Play the US Market Optimism).

iShares Core S&P Small-Cap ETF IJR

Small-cap stocks generally lead the way higher on improving American economic health as these are closely tied to the U.S. economy and generate most of their revenues from the domestic market. IJR, which tracks the tracks the S&P SmallCap 600 Index, appears to be an excellent choice. The product has amassed $70.1 billion in its asset base while trading in solid volume of around 4.7 million shares. IJR charges 6 bps in fees per year and has a Zacks ETF Rank #2.

Consumer Discretionary Select Sector SPDR Fund XLY

Increased spending will have a positive impact on the consumer discretionary sector, which attracts a major portion of consumer spending. As such, investors could tap the encouraging trend in the basket form through the ultra-popular, XLY, which has AUM of $20.6 billion and an average daily volume of about 4.4 million shares. It charges 12 bps in fees per year and has a Zacks ETF Rank #2.

iShares Dow Jones Transportation Average Fund IYT

As millions of Americans who receive COVID-19 vaccinations will return to leisure and amenities like restaurants, ballparks and theaters, the demand for transport will increase, propelling its ETFs higher. The popular in the space is IYT with AUM of $2.1 billion and average daily volume of 198,000 shares. It offers exposure to U.S. airline, railroad, and trucking companies. The fund charges 42 bps in annual fees and has a Zacks ETF Rank #2.

Invesco DWA Basic Materials Momentum ETF PYZ

The strong demand for both consumer and business goods will continue to boost the materials sector. While many of the ETFs are well positioned to make the most of it, PYZ with a Zacks ETF Rank #2 looks intriguing. This ETF offers exposure to companies showing relative strength (momentum). It has amassed $116.7 million in its asset base while charges 60 bps in fees and expenses. Volume is low as it exchanges nearly 22,000 shares in hand a day (read: Stocks & ETFs to Play the Robust Basic Materials Sector).

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ISHARS-TRAN AVG (IYT): ETF Research Reports

SPDR-CONS DISCR (XLY): ETF Research Reports

VIPERS-GROWTH (VUG): ETF Research Reports

ISHARS-SP SC600 (IJR): ETF Research Reports

INVS-DW BAS MT (PYZ): ETF Research Reports

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