Top ETF Stories of August

U.S. stocks closed the month of August with gains as optimism grew around potential Federal Reserve rate cuts following a favorable inflation report. The Dow Jones Industrial Average rose 0.9% last week and 4.6% in the past month (as of Aug. 30, 2024). The S&P 500 advanced 0.2% last week and 5.7% in the past month while the Nasdaq Composite lost 0.9% last week and delivered a monthly return of 5.6%.

Tech Sector Remains Volatile

The tech sector wavered in early August on cues of delayed return-on-investments on tech biggies’ huge artificial intelligence (AI) investments. Investors also reacted to NVIDIA’s (NVDA) earnings, which reported a beat on both lines but came up with largely in-line forecasts. Investors sought more optimism from the AI king NVIDIA.

The AI behemoth’s subdued performance resulted in a loss for the Nasdaq Composite last week despite its late-week recovery. Overall, the crucial tech ETF XLK gained 4.6% in August despite volatility (read: Cybersecurity ETFs Won in August Despite Tech Volatility).

Dovish Fed Policy Outlook

The Federal Reserve closely monitors PCE inflation levels to gauge the need for interest rate adjustments. Following Chairman Jerome Powell's recent remarks signaling a forthcoming rate cut in September, market expectations for a 0.5% rate cut have increased, though a 0.25% cut remains a possibility due to steady price pressures observed in July.

No wonder, FolioBeyond Alternative Income and Interest Rate Hedged ETF RISR — which seeks to provide diversification benefits and helps to manage risk from interest rate volatility — was off 0.3% last month. iShares 20+ Year Treasury Bond ETF TLT, which fares better in a falling rate environment, gained about 1.2% in August.

Gold bullion ETF SPDR Gold Trust GLD, which is another beneficiary of the Fed rate cut, gained 2.4% in August. This is especially true given that Invesco DB US Dollar Index Bullish Fund UUP lost 2% last month and gold gains if the U.S. dollar falls (read: U.S. Dollar to Drop Ahead? ETFs to Gain/Lose).

U.S. Economy in Fine Fettle

The U.S. economy grew in Q2 at a healthy 3% annual pace, fueled by strong consumer spending and business investment. Consumer spending, which makes about 70% of U.S. economic activity, increased at a 2.9% annual rate last quarter, up from 2.3% in the government’s initial estimate, as quoted on CNBC. The second-quarter growth marked a sharp acceleration from a lackluster 1.4% growth rate in the first three months of 2024.

Mixed Signals in Retail: Are U.S. Consumers Resilient?

Retail sales in the United States gained 1% sequentially in July 2024, following a downwardly revised 0.2% drop in June and way better than forecasts of a 0.3% gain. It marked the biggest increase since January 2023 (read: Retail Sales Gains in July: ETFs & Stocks to Play).

In late August, Walmart WMT offered a reassuring message to investors concerned about U.S. consumers’ health. CFO John David Rainey stated that Walmart's customers were making deliberate choices, downplaying broader economic concerns by asserting, "We're not seeing it,” as quoted on Yahoo Finance.

However, recent earnings reports from major retail players paint a more uncertain picture. Companies like Dollar General DG, Lululemon LULU, Abercrombie & Fitch ANF and Ulta Beauty ULTA faced mixed market reactions after expressing caution about the overall spending environment.

This put focus on consumer ETFs like Consumer Discretionary Select Sector SPDR ETF XLY (which was up about 2.3% in August) and Consumer Staples Select Sector SPDR Fund XLP (up about 5% in August). Investors should note that XLY ETF is heavy on Amazon AMZN, which lost 3% in August while XLP ETF is heavy on Walmart (which is up 10.7% in August) and Procter & Gamble PG (up 3.5% in August).

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