Some forecast recession but consumers still spending

With the S&P 500 briefly dipping into a bear market last month, it is no surprise that some analysts and CEOs have started to bring up that dreaded word… recession.  

Jamie Dimon, CEO of JPMorgan Chase, warned investors of an “economic hurricane” due to the simultaneous forces of conflict in Ukraine, high levels of inflation, and the Federal Reserve beginning to hike interest rates. Other CEOs have echoed similar thoughts, forecasting a stagflationary environment, one characterized by high inflation and low growth.

Company leaders are not the only ones feeling pessimistic about the economic outlook. The Conference Board Consumer Confidence Index has been trending downwards this year, with expectations weakening, suggesting consumers do not foresee economic growth increasing in the months ahead.

Travel ETFs show resilience

Despite Omicron and related variants causing spikes in infections worldwide, consumers seem willing to travel after delaying plans for the past several years. Travel ETFs, too, have shown resilience this year.

The Defiance Hotel, Airline, and Cruise ETF (CRUZ), a similar ETF that tracks a different index of the same three industries, is outperforming the S&P 500 by 3.3% through June 3.

Given the similar scope of each of these ETFs, performance generally moves in line with one another though there are slight differences in holdings. However, CRUZ does have one significant benefit, and that is a lower expense ratio – 0.45% relative to 0.75% for TRYP. This lower expense ratio is likely why the fund has been more successful in gathering assets – nearing $50 million, while TRYP has only gathered $12 million so far.

One other travel ETF of note is the AdvisorShares Hotel ETF (BEDZ), which outperforms the S&P 500 by 2.7% this year. This fund predominantly invests in U.S. companies that receive at least 50% of their revenues from the hotel business. This fund is the only actively managed travel ETF, which explains its comparatively high expense ratio of 0.99% 

Over the trailing year, these three travel ETFs are underperforming the broad market. However, data showing that consumers are finally ready to explore along with more countries dropping travel restrictions could provide further support for these and other travel-related ETFs heading into the busy summer months.

Are Retail ETFs on sale? 

Travel isn’t the only thing that consumers are spending on. Though inflation remains at multi-decade highs, consumer spending increased by 0.9% in April. Even adjusted for inflation, spending rose by 0.7%, as consumers increased their outlays on both goods and services. 

Retail and other ETFs that are designed to offer exposure to consumer spending have struggled this year. Online retail ETFs have been some of the hardest hit, with the ProShares Online Retail ETF (ONLN) and the Amplify Online Retail ETF (IBUY) both falling by -39.0% and -45.5%, respectively, so far this year. The Global Online Retail UCITS ETF (PBUY) is a similar option for European investors and has fallen by -58.1% this year.
The pandemic accelerated a shift to online spending, exacerbating a trend that had already been in place for years. These ETFs soared in 2020, with the triple-digit returns that year but have since underperformed the broad market.

Other ETFs that are designed to capture consumer spending on services have similarly underperformed the S&P 500 so far this year. The Invesco Dynamic Leisure and Entertainment ETF (PEJ), which tracks an index of U.S. entertainment and leisure stocks, is down -14.9% so far this year, underperforming the S&P 500 by 1.6%. 

The AdvisorShares Restaurant ETF (EATZ), similar to BEDZ, is an actively managed fund, focused on U.S. companies that derive 50% or more of their revenue from the restaurant business. The fund has fallen by -18.7% this year.

Though inflation is undoubtedly putting pressure on companies held within these portfolios, particularly as food and labor costs soar, an increase in consumer spending in these areas leads one to wonder if ETFs that offer exposure to consumer spending are temporarily on sale. Should CEO predictions of doom and gloom turn out to be too pessimistic and consumer behavior remain strong, these ETFs could see a rebound as performance falls more in line with the economic data.