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The Trouble With Momentum – And What To Do About It

Summary Growth stocks have outperformed value stocks in recent years, which is shining a spotlight on momentum. Unlike other investment factors, the momentum premium has been persistent since it was identified by financial academics in the 1990s. We believe that combining momentum with value and other factors within a multi-factor framework is a compelling way to address the challenge of tapping momentum profitably in a growth portfolio. It’s no secret that growth stocks have outperformed value stocks in recent years. For example, in the two years from September 1, 2013 to August 31, 2015, large cap growth stocks (as measured by the Russell 1000 Growth Index) returned 14.7% annualized vs. 9.6% annualized for value stocks (Russell 1000 Value Index). This pattern of outperformance has shone a spotlight on momentum , an investment factor that works particularly well in growth-stock investing. But making money by identifying growth stocks with momentum characteristics isn’t as easy as it sounds. In this column, I will explain why and briefly describe how Gerstein Fisher addresses some of the problems inherent in tilting a growth stock portfolio to momentum. Momentum: a Persistent Investment Factor First, let’s define what we mean by momentum. Momentum is the tendency for winning stocks (that is, stocks that have outperformed the market over the past three to 12 months) to keep winning and losing stocks to keep losing. First identified in papers co-authored in the early 1990s by Sheridan Titman, one of our Academic Partners, the momentum factor would seem to refute the weak form of the Efficient Market Hypothesis, which asserts that stock prices reflect all available information and that past price movements should be unrelated to future average returns. Momentum suggests that prior movements in price are in fact related to expected stock returns – that security prices essentially have memory, which students of statistics will recognize as serial correlation. Since those landmark studies in the 1990s, a number of other academic papers have established that a momentum strategy works not only in equity markets around the world (with the notable exception of Japan’s) but also in several other asset classes, including currencies and commodities. At Gerstein Fisher, we find that a momentum tilt works at least as well in our multi-factor real estate investment trust (aka REIT) portfolio as in our US and international growth equity strategies. Exhibit 1 shows the compound annualized returns from 1927 to 2014 for 10 portfolios formed on momentum (defined here as the one-year return skipping the most recent month). Investing in the highest past one-year return (i.e., highest-momentum) stocks generated a 16.9% annualized return, while the lowest decile of momentum lost 1.5% per year. Note the steady improvement in performance as momentum increases. (click to enlarge) Moreover, unlike some other investment factors identified by financial academics, momentum has remained remarkably robust and persistent. For instance, since the size premium for small cap stocks was identified in the early 1980s, it has shrunk dramatically (see my recent column for more on this phenomenon: ” Is the Small Cap Stock Premium Disappearing? “); similarly, the value premium has also sharply declined since Fama and French published their pioneering paper on it in 1992. Quite possibly, once seminal research is available in the public domain, quantitative investors target and thereby reduce the available premiums, although they still exist. But momentum seems to be different: our research shows that the strategy has remained profitable, generating a momentum premium of five to seven percentage points* even years after Prof. Titman’s groundbreaking papers in the 1990s. The Challenge for Momentum So if all of this academic and empirical evidence for momentum is present, then what’s the problem? For one thing, momentum stocks are also subject to short-term reversals, the tendency for stocks that have risen relative to the rest of the market in the last month to underperform those that have fallen relative to the rest of the market (for more on this topic, see our recently posted paper: ” Do past returns predict future returns? Evidence from Momentum and Short – Term Reversals “). In addition, the discipline and emotion-free decisions required to hold high-momentum winners and cut low-momentum losers every month are behaviorally difficult for many individual investors to make. Most importantly, there is a very large issue with turnover and transaction costs (and tax liabilities, if held in a taxable account) with a momentum growth stock portfolio. In short, without rules for controlling portfolio turnover, transaction costs will quickly devour a premium from a tilt to momentum (a monthly rebalanced, long-only momentum strategy may have a turnover of about 300%, implying a holding period of around four months). We believe that an effective approach to addressing the problem of excess turnover is by combining momentum, a so-called fast-moving factor, with value (which we may define, for instance, as a tilt to higher book-to-market stocks than the Russell 3000 Growth Index), a slow-moving factor. Combining these two negatively correlated factors in one portfolio provides factor diversification, which is a good thing since there are pronounced and different cycles to different factors. But we also find that by combining the signals of value and momentum, we can slow down portfolio trading dramatically and improve risk-adjusted performance, both relative to the index and compared to the sum of standalone value and momentum strategies-a typical advantage of a multi-factor strategy in one portfolio. We will soon publish our research on the optimum way to combine momentum and value in an academic journal. In the meantime, I invite you to read our working paper: ” Combining Value and Momentum “. Conclusion Growth stocks – and momentum – have been the source of strong performance in the stock market. The momentum premium is palpable but difficult to tap profitably in a growth portfolio. We believe that combining momentum with value and other factors within a multi-factor framework is a compelling way to address this challenge. *The momentum premium is defined as the returns of the highest 30% of large cap US stocks rated by momentum less the return of the lowest 30% of stocks rated by momentum. Data on momentum decile portfolios are taken from Ken French’s website. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

ETF Stats For August 2015 – Assets Fall As Trading Jumps

ETF industry assets dropped 5.4% in August as trading surged 33.5%. Product count increased by only four because the 24 launches were nearly overshadowed by the 20 ETF deaths. The month closed with 1,768 active listings, consisting of 1,574 ETFs and 194 ETNs. The actively managed fund count held steady at 133, although their assets moved 2.0% higher. Assets shrunk by $115 billion for the month as negative market action swamped the less-than $3 billion of cash inflows. The setback puts overall assets at just a little over the $2 trillion mark and the year-to-date asset gains at just 1.0%. Actively managed funds fared better than passive funds in August as assets increased to $21.2 billion, which represents a 2.0% gain for the month and a healthy 23.1% year-to-date jump. The quantity of ETFs with more than $10 billion in assets slipped from 54 to 52, and these 2.9% of the listings control 56% of the assets. Funds with more than $1 billion in assets declined by 4 to 259 and they hold an 84.7% market share. The average ETF has $1.18 billion in assets, but average does not imply typical. Only 228 products are above average when it comes to assets, while the other 1,540 (87%) are below average. The median asset size across all products is about $75 million. August is often a sleepy month for trading activity as summer vacations tend to put a damper on market volume. This August was far from typical, as ETF trading activity surged to its second-highest monthly level in more than four years. The total dollar volume of ETFs and ETNs was $2.12 trillion for the month. This was a 33.5% jump from July and a whopping 178% surge from August 2014. As usual, the vast majority of the trading was concentrated in relatively few ETFs. 14 products averaged more than $1 billion per day in trading activity, and this elite group captured a 61.1% market share. At the other extreme, there were 1,419 products that failed to muster $10 million in average daily trading. Even though they represent 80% of the products on the market, they accounted for only 2% of the trading action. Realizing how tough it is to succeed in the ETF space, industry leader BlackRock (NYSE: BLK ) closed and liquidated 18 iShares ETFs. 2 of the closing funds had more than $30 million in assets, which is above the $25 million limit for ETF Deathwatch inclusion. So far this year, 11 products with more than $25 million in assets have closed. It may be time to raise the threshold. Currency hedging remains the dominant theme for new launches. 12 of the 24 new ETFs released in August boast a currency-hedged strategy. Deutsche Bank (NYSE: DB ) had some early success with this approach, and it now appears to be the firm’s primary thrust for its X-trackers product line. 10 new Deutsche X-trackers ETFs employing currency hedging arrived in August. Additionally, Deutsche closed 9 of its unhedged funds this year. Of the 32 X-trackers listed for trading in the US, 24 use currency hedging, 3 use interest rate hedging, and only 5 are unhedged. August 2015 Month End ETFs ETNs Total Currently Listed U.S. 1,574 194 1,768 Listed as of 12/31/2014 1,451 211 1,662 New Introductions for Month 24 0 24 Delistings/Closures for Month 20 0 20 Net Change for Month +4 0 +4 New Introductions 6 Months 145 4 149 New Introductions YTD 179 5 184 Delistings/Closures YTD 56 22 78 Net Change YTD +123 -17 +106 Assets Under Mgmt ($ billion) $1,993 $25.3 $2,019 % Change in Assets for Month -5.5% +1.5% -5.4% % Change in Assets YTD +1.1% -6.0% +1.0% Qty AUM > $10 Billion 52 0 52 Qty AUM > $1 Billion 252 7 259 Qty AUM > $100 Million 765 35 800 % with AUM > $100 Million 48.6% 18.0% 45.3% Monthly $ Volume ($ billion) $2,040 $80.8 $2,120 % Change in Monthly $ Volume +33.7% +31.0% +33.5% Avg Daily $ Volume > $1 Billion 12 2 14 Avg Daily $ Volume > $100 Million 102 7 109 Avg Daily $ Volume > $10 Million 337 12 349 Actively Managed ETF Count (w/ change) 133 +0 mth +8 ytd Actively Managed AUM ($ billion) $21.2 +2.0% mth +23.1% ytd Data sources: Daily prices and volume of individual ETPs from Norgate Premium Data. Fund counts and all other information compiled by Invest With An Edge. New products launched in August (sorted by launch date): Virtus Newfleet Multi-Sector Unconstrained Bond ETF (NFLT), launched 8/11/2015, is an actively managed ETF with a main objective of providing a high level of current income and a secondary objective of capital appreciation. The ETF will rotate among various global bond market sectors at times the managers believe they will outperform. Yield information is not currently provided. The expense ratio will be capped at 0.80% until 8/10/16 ( NFLT overview ). Deutsche X-trackers MSCI All World ex US High Dividend Yield Hedged Equity ETF (HDAW), launched 8/12/2015, is designed to invest in non-US companies with higher-than-average dividend yields while mitigating exposure to fluctuations between the value of the component currencies and the US dollar. Equities can be selected from both developed and emerging markets, with the largest geographic exposure currently being the UK at about 33%. Current yield is 4.4%. HDAW has an expense ratio of 0.45% ( HDAW overview ). Deutsche X-trackers MSCI EAFE High Dividend Yield Hedged Equity ETF (HDEF), launched 8/12/2015, invests in non-US companies with higher-than-average dividend yields while offsetting value changes between the component currencies and the US dollar using forward currency contracts. Equities are selected from among the MSCI EAFE universe, with the largest geographic exposure currently being the UK at about 40%. Current yield is 4.4%. The ETF sports an expense ratio of 0.45% ( HDEF overview ). Deutsche X-trackers MSCI Emerging Markets High Dividend Yield Hedged Equity ETF (HDEE), launched 8/12/2015, is designed to invest in emerging market companies with higher-than-average dividend yields while mitigating exposure to fluctuations between the value of the component currencies and the US dollar. China leads the way with about a 31% country allocation, and the current yield is 4.1%. The ETF’s expense ratio is 0.65% ( HDEE overview ). Deutsche X-trackers MSCI Eurozone High Dividend Yield Hedged Equity ETF (HDEZ), launched 8/12/2015, invests in European companies with higher-than-average dividend yields while offsetting value changes between the euro and the US dollar using forward currency contracts. The largest geographic exposure is Germany at about 24%, with France coming in next at about 19%. Current yield is 4.2%. Investors will pay 0.45% annually to own this ETF ( HDEZ overview ). Guggenheim S&P 500 Equal Weight Real Estate ETF (NYSEARCA: EWRE ), launched 8/13/2015, is designed to provide an investment option composed of the companies in the S&P 500 that are included in the real estate sector, excluding mortgage real estate investment trusts (REITs). The holdings are equally weighted and will be rebalanced quarterly. EWRE has an expense ratio of 0.40% ( EWRE overview ). Deutsche X-trackers Japan JPX-Nikkei 400 Hedged Equity ETF (NYSEARCA: JPNH ), launched 8/19/2015, will hold 400 Japanese securities that are selected based on qualitative and quantitative measures such as return on equity (ROE), cumulative operating profit, and market capitalization. The ETF then hedges its currency risk between the US dollar and Japanese yen with forward contracts. The expense ratio is capped at 0.45% until 10/1/16 ( JPNH overview ). Deutsche X-trackers MSCI Australia Hedged Equity ETF (DBAU), launched 8/19/2015, invests in large- and mid-capitalization Australian stocks while utilizing currency forwards to minimize fluctuations between the Australian and US dollars. The ETF currently holds 70 securities, with over 50% representing the Financials sector. The ETF sports an expense ratio of 0.45% ( DBAU overview ). Deutsche X-trackers MSCI EAFE Small Cap Hedged Equity ETF (DBES), launched 8/19/2015, is designed to give investors access to small-cap, developed market equities outside of the US while mitigating exposure to currency fluctuations. There are over 2,000 holdings representing 21 countries. The ETF’s expense ratio is 0.45% ( DBES overview ). Deutsche X-trackers MSCI Italy Hedged Equity ETF (DBIT), launched 8/19/2015, is currently invested in 26 large- and mid-capitalization Italian equities. DBIT uses forward contracts to minimizing the value fluctuations between the US dollar and the euro. Holdings of Intesa Sanpaolo and Eni combine to be about 25% of the fund. Investors will pay 0.45% annually to own this ETF ( DBIT overview ). Deutsche X-trackers MSCI Southern Europe Hedged Equity ETF (DBSE), launched 8/19/2015, selects large- and mid-capitalization equities in Spain, Italy, and Portugal while minimizing the value fluctuations between the US dollar and the euro. The underlying MSCI Index excludes Greece, which lies further south than the three constituent countries. Sector allocation is heavy in Financials at nearly 42%, while 56% of the 55 holdings are in Spain. DBSE has an expense ratio of 0.45% ( DBSE overview ). Deutsche X-trackers MSCI Spain Hedged Equity ETF (DBSP), launched 8/19/2015, is currently invested in 25 large- and mid-capitalization Spanish equities. DBSP utilizes forward contracts to minimize the fluctuations between the value of the US dollar and euro. Financials leads the sector allocation at nearly 42%, with Banco Santander the top holding at 17.2%. The ETF sports an expense ratio of 0.45% ( DBSP overview ). Direxion Daily Homebuilders & Supplies Bear 3x Shares (CLAW), launched 8/19/2015, is designed to return a leveraged daily return of -300% (inverse) of the Dow Jones US Select Home Construction Index. The Index includes a variety of companies that provide home building services and products, such as builders, home improvement retailers, and suppliers of building materials and fixtures. The expense ratio will be capped at 0.95% until 9/1/17 ( CLAW overview ). Direxion Daily Homebuilders & Supplies Bull 3x Shares (NAIL), launched 8/19/2015, has a goal of providing a leveraged daily return of 300% of the Dow Jones US Select Home Construction. The Index includes a variety of companies that provide home building services and products, such as suppliers of building materials and furnishings, builders, and home improvement retailers. The expense ratio will be capped at 0.95% until 9/1/17 ( NAIL overview ). Direxion Daily Regional Banks Bear 3x Shares (WDRW), launched 8/19/2015, seeks to provide a daily return of -300% (inverse) of an index reflecting the 50 largest regional banks in the US. The banks are selected based on their free-float market capitalization and then equally weighted. The expense ratio will be capped at 0.95% until 9/1/17 ( WDRW overview ). Direxion Daily Regional Banks Bull 3x Shares (DPST), launched 8/19/2015, attempts to provide a 300% daily return of the Solactive US Regional Banks Total Return Index. The Index selects the 50 largest regional banks in the US based on free-float market capitalization and then equally weights the holdings. The expense ratio will be capped at 0.95% until 9/1/17 ( DPST overview ). Market Vectors Oil Refiners ETF (Pending: CRAK ), launched 8/19/2015, invests in the largest and most liquid companies in the global oil refining segment. It currently holds 25 companies that produce gasoline, jet fuel, fuel oil, naphtha, and other petrochemicals. The US accounts for about half of the geographic allocation, with the next largest being Japan at about 10.9%. The manager will cap expenses at 0.59% until 5/1/17 ( CRAK overview ). O’Shares FTSE Asia Pacific Quality Dividend ETF (OASI), launched 8/19/2015, invests in large- and mid-capitalization companies in Asia Pacific that pay dividends. Holdings are selected based on several factors such as liquidity, high quality, low volatility, and dividend yield. The largest country represented is Japan at 43.9%, and the sector allocation is relatively even with six over 10%. OASI has a 0.58% expense ratio ( OASI overview ). O’Shares FTSE Europe Quality Dividend ETF (OEUR), launched 8/19/2015, invests in large- and mid-capitalization, dividend-paying European equities. Holdings are selected based on several factors such as liquidity, high quality, low volatility, and dividend yield. The UK has the largest country allocation at 43.1%. Health Care and Consumer Goods lead the sectors at about 19% each. Investors will pay 0.58% annually to own this ETF ( OEUR overview ). Compass EMP International 500 Volatility Weighted Index ETF (NASDAQ: CIL ), launched 8/20/2015, invests in up to 500 large-cap equities in developed stock markets, excluding the US. The ETF’s selection process starts with screening for companies with net positive earnings for four consecutive quarters. It then selects the largest 500 and weights them based on their daily standard deviation (volatility). Countries with more than a 10% allocation include Japan at 20.5% and the UK at 12.7%. The expense ratio is capped at 0.45% until 6/30/17 ( CIL overview ). Compass EMP International High Dividend 100 Volatility Weighted Index ETF (NASDAQ: CID ), launched 8/20/2015, selects the 100 highest dividend-paying equities from the CEMP International 500 Volatility Weighted Index and weights them based on their daily standard deviation (volatility). The UK tops the country allocation with 19.5%. Australia is close behind at 17.5%. The expense ratio is capped at 0.45% until 6/30/17 ( CID overview ). O’Shares FTSE Asia Pacific Quality Dividend Hedged ETF (OAPH), launched 8/25/2015, is a fund-of-funds seeking to invest in Asia Pacific large- and mid-capitalization equities that exhibit relatively low volatility and high dividend yields while reducing the impact of changes between the value of the underlying currencies and the US dollar. The ETF holds O’Shares FTSE Asia Pacific Quality Dividend ETF (OASI) and then hedges against the currency risk. The ETF’s expense ratio is 0.68% ( OAPH overview ). O’Shares FTSE Europe Quality Dividend Hedged ETF (OEUH), launched 8/25/2015, is a fund-of-funds investing in large- and mid-capitalization equities across the European region that exhibit relatively low volatility and high dividend yields while minimizing the impact value fluctuations between the underlying currencies and US dollar. The ETF holds O’Shares FTSE Europe Quality Dividend ETF (OEUR) and then hedges against the currency risk. It sports a 0.68% expense ratio ( OEUH overview ). Vanguard Tax-Exempt Bond ETF (NYSEARCA: VTEB ), launched 8/25/2015, offers diversified exposure to the investment-grade US municipal bond market. Its objective is to provide moderate current income in a long-duration portfolio with high credit quality. Yield information is not yet provided. VTEB has an expense ratio of 0.12% ( VTEB overview ). Product closures/delistings in August: AdvisorShares Accuvest Global Long Short (NYSEARCA: AGLS ) ETFS Physical Asian Gold Shares (NYSEARCA: AGOL ) iShares FTSE China (NASDAQ: FCHI ) iShares MSCI All Country Asia Info Technology (NASDAQ: AAIT ) iShares MSCI All Country Asia ex-Japan Small-Cap (NASDAQ: AXJS ) iShares MSCI Australia Small-Cap (BATS: EWAS ) iShares MSCI Canada Small-Cap (BATS: EWCS ) iShares MSCI Emerging Markets Growth (NASDAQ: EGRW ) iShares MSCI Emerging Markets Value (NASDAQ: EVAL ) iShares MSCI Emerging Markets Eastern Europe (NYSEARCA: ESR ) iShares MSCI Emerging Markets EMEA (NASDAQ: EEME ) iShares MSCI Emerging Markets Cons Discretionary (NASDAQ: EMDI ) iShares MSCI Emerging Markets Energy Sector (NASDAQ: EMEY ) iShares MSCI Hong Kong Small-Cap (NYSEARCA: EWHS ) iShares MSCI Singapore Small-Cap (NYSEARCA: EWSS ) iShares Asia Developed Real Estate (NASDAQ: IFAS ) iShares North America Real Estate (NASDAQ: IFNA ) iShares Financials Bond (NYSEARCA: MONY ) iShares Industrials Bond (NYSEARCA: ENGN ) iShares Utilities Bond (NYSEARCA: AMPS ) Product changes in August: Goldman Sachs discontinued issuing shares of GS Connect S&P GSCI Enhanced Commodity Total Return Strategy Index ETN (NYSEARCA: GSC ) on June 9. It is now a broken product without a functioning share creation and redemption process. Buyers, sellers, and holders beware. The Forensic Accounting ETF (NYSEARCA: FLAG ) became the WeatherStorm Forensic Accounting Long-Short ETF ( FLAG ) effective August 7 . The underlying index changed from the long-only Del Vecchio Earnings Quality Index to the WeatherStorm Forensic Accounting Long-Short Index. The new index is constructed with a 130% long and 30% short (130/30) equity exposure. Fidelity Investments made changes to its commission-free ETF lineup by adding iShares MSCI All Country World Minimum Volatility (NYSEARCA: ACWV ) and iShares Short Treasury Bond (NYSEARCA: SHV ) effective August 24. It also removed iShares MSCI Emerging Markets EMEA ETF ( EEME ) as of August 24 and will remove iShares U.S. Real Estate ETF (NYSEARCA: IYR ) effective October 31. WisdomTree renamed thirteen of its ETFs effective August 31. Changes included “Dividend Growth” to “”Quality Dividend Growth”, “DEFA” to “International”, and “Equity Income” to “High Dividend”. Announced Product Changes for Coming Months: The iShares iBonds Sep 2015 AMT-Free Muni Bond ETF (NYSEARCA: IBMD ) is scheduled to mature and will cease trading after the market closes on September 1. The iShares MSCI USA ETF (NYSEARCA: EUSA ), a capitalization-weighted fund, will undergo an extreme makeover on September 1, becoming the iShares MSCI USA Equal Weighted ETF ( EUSA ). The iShares Japan large-Cap ETF (NYSEARCA: ITF ), based on the S&P/TOPIX 150 Index, will undergo an extreme makeover on September 4, becoming the iShares JPX-Nikkei 400 ETF ( ITF ). Deutsche X-trackers Regulated Utilities (NYSEARCA: UTLT ) and Deutsche X-trackers Solactive Investment Grade Subordinated Debt (NYSEARCA: SUBD ) will close with September 9 being their last day of trading. State Street will forward split ten of its SPDR industry ETFs effective September 10. VelocityShares 3x Long Crude Oil ETN (NYSEARCA: UWTI ) will have a 1-for-10 reverse split and VelocityShares 3x Long Natural Gas ETN (NYSEARCA: UGAZ ) will have a 1-for-5 reverse split effective September 10 . ProShares UltraShort Telecommunications (NYSEARCA: TLL ) will close with September 14 being its last day of trading. Van Eck Global will close its four international quality ETFs with September 18 being the last day of trading for QEM, QDEM, QXUS, and QDXU. Shareholders that do not sell prior to the delisting will have to wait nearly six weeks (to October 28) to get their money . PIMCO will close three ETFs with September 23 being the last day of trading. Affected funds are PIMCO 3-7 Year U.S. Treasury Index ETF (NYSEARCA: FIVZ ), PIMCO 7-15 Year U.S. Treasury Index ETF (NYSEARCA: TENZ ), and the actively managed PIMCO Foreign Currency Strategy Active (NYSEARCA: FORX ). Direxion will perform reverse splits on six of its leveraged ETFs effective October 1 (originally scheduled for September 10). Van Eck Global plans to acquire Yorkville MLP ETFs ( press release ) and hopes to close the transaction in the fourth quarter. Previous monthly ETF statistics reports are available here . Disclosure covering writer: No positions in any of the securities mentioned. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.

ETFs To Watch On Increasing Consumer Credit

The Federal Reserve reported on Tuesday that consumer credit increased in July, an indication of rising consumer confidence in a favorable economic environment. It was reported that the volume of consumer credit rose by $19.1 billion or at an annual rate of 6.7% in July, outpacing the consensus estimate of $18 billion. This was preceded by a gain of $27 billion in June. Moreover, with July’s increase, consumer credit finished in the positive territory every month for nearly four years. According to the report, revolving credit in July increased at an annual pace of 5.7% after surging 10% in June. Non-revolving credit, which includes auto and student loans, also witnessed a gain of 7%, preceded by June’s rise of 9.4%. This encouraging report indicated that consumers who play an important role in boosting the U.S. economy are gradually gaining confidence on the back of a recovering economy, low oil prices and a steady labor market. Consumers Boosting Economy The rise in consumer spending has helped the U.S. economy to rebound strongly in the second quarter after witnessing sluggish first-quarter growth. The “second estimate” released by the U.S. Department of Commerce showed that the GDP in the second quarter advanced at a pace of 3.7%, compared to the first quarter’s rise of only 0.6%. According to the report, consumer spending, which contributes more than 75% to economic activity, rose 3.1% during the second quarter, outpacing the first quarter’s growth rate of 1.8%. It contributed more than 2.1% to the second-quarter GDP, the highest by any segment. Meanwhile, the consumer credit report indicated that auto loans – a key component in the non-revolving credit segment – played an important part in boosting debt volume in this section. This is evident from the encouraging auto sales report released recently. In August, automakers witnessed the highest rate of increase in light vehicle sales in the U.S. in 10 years. Along with factors such as low oil prices, a recovering economy and an improving labor market condition, easy availability of credit with lower interest rates and longer repayment periods also helped consumers to spend more in the auto sector. Factors Lifting Consumer Sentiment A steady job market had no little impact in the recent boost to consumer sentiment. Though the U.S. job numbers in August grew at the most sluggish pace in five months, the unemployment rate dropped to 5.1% from 5.2%, the lowest since April 2008. Moreover, the job report showed that average hourly wages rose 0.3% sequentially and 2.2% year over year. Meanwhile, the slump in oil prices is another important factor that enabled U.S. consumers to spend more over the past few months. Oil price skidded to half over the past one year amid increasing production, a large supply glut and sluggish demand. The situation is hardly expected to improve in the near future, as there is little hope of a reduction in oil supply. While the U.S. and Organization of Petroleum Exporting Countries (OPEC) are still producing oil at multi-year highs, Iran is looking to boost its production once the Tehran sanctions are lifted. ETFs to Consider ETFs exposed to sectors that attract a major part of consumer spending are poised to gain from this bullish consumer credit report. As mentioned above, the auto sector was one to receive a significant part of consumer credit in July. In this situation, investors may consider the auto ETF – the First Trust NASDAQ Global Auto ETF (NASDAQ: CARZ ) – in order to tap the positive trend. CARZ holds a Zacks ETF Rank #2 (Buy) and gained nearly 3.9% yesterday and around 3.4% over the past one week. Separately, another sector that receives a notable share of consumer spending is consumer discretionary. Positive consumer credit data also had a positive impact on ETFs that are exposed to this sector. Among them, the Consumer Discretionary Select Sector SPDR ETF (NYSEARCA: XLY ), the SPDR S&P Retail ETF (NYSEARCA: XRT ) and the iShares U.S. Consumer Services ETF (NYSEARCA: IYC ) gained 2.3%, 2% and 2.3% yesterday, respectively. The ETFs mentioned above hold either a Zacks ETF Rank #1 (Strong Buy) or a Zacks ETF Rank #2 (Buy) and may thus be on the radar of investors looking to gain from the favorable scenario. Original Post