U.S. Service Sector Growth Down In December: ETFs In Focus

The IHS Markit U.S. Services Business Activity Index reflected slower expansion in service activity in the United States, owing to slower increase in new business received by service providers.

IHS Markit services PMI came up with a reading of 53.7 in December 2017 compared with 54.5 in November. This was the weakest reading since May 2017. However, it was above the flash estimate of 52.4. A reading of more than 50 indicates expansion.

Coming to factors driving the expansion, rise in new order volumes drove growth in the sector, as favorable market conditions led to an increase in new business activity, albeit at a slower pace.

The IHS Markit U.S. Composite PMI decreased to 54.1 in December compared with 54.5 in the prior month. “The final services and manufacturing PMI surveys collectively signalled faster business activity growth than the earlier flash readings, though still indicated a moderation in the pace of expansion to the weakest since June. A welcome improvement in manufacturing output growth was countered by a slowdown in the comparatively larger services economy,” said Chris Williamson, Chief Business Economist at IHS Markit.

Economic Scenario

GDP increased 3.2% year over year in the third quarter of 2017 compared with 3.1% in the second quarter. Although this was below the second estimate of 3.3%, it still marked the highest growth since first quarter of 2015. Moreover, President Donald Trump’s tax reform was recently signed into law. As a result, Fed members increased their expectations for 2018 GDP growth from 2.1% to 2.5%.

U.S. private sector added 250,000 jobs in December compared with Reuters’ expectations of a gain of 190,000. "This was a solid number and with a near record amount of job openings, maybe more people are coming off the sidelines, enticed by higher wages which are coming," Peter Boockvar, chief investment officer at Bleakley Financial Group said to CNBC.

Let us now discuss a few ETFs focused on providing exposure to U.S. equities.

SPDR S&P 500 ETF (NYSE:SPY) (AX:SPY)

This fund is the most popular ETF traded in the U.S. markets. It seeks to provide exposure to the largest and most stable companies and tracks the S&P 500 index.

It has AUM of $274.4 billion and charges a fee of 9 basis points a year. From a sector look, the fund has high exposures to Information Technology, Financials and Health Care with 24.0%, 14.7% and 13.9% allocation, respectively (as of Jan 3, 2017). The fund’s top three holdings are Apple Inc (NASDAQ:AAPL) , Microsoft Corporation (NASDAQ:MSFT) and Amazon.com Inc (NASDAQ:AMZN) with 3.8%, 2.9% and 2.1% allocation, respectively (as of Jan 3, 2017). The fund has returned 22.2% in a year. It has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

iShares Core S&P 500 ETF IVV

This fund is a low-cost ETF that seeks to provide exposure to the large established U.S. companies and tracks the S&P 500 index.

It has AUM of $145.3 billion and charges a fee of 4 basis points a year. From a sector look, the fund has high exposures to Information Technology, Financials and Health Care with 24.0%, 14.6% and 13.8% allocation, respectively (as of Jan 3, 2017). The fund’s top three holdings are Apple Inc, Microsoft Corporation and Amazon.com Inc with 3.8%, 2.9% and 2.1% allocation, respectively (as of Jan 3, 2017). The fund has returned 22.3% in a year. It has a Zacks ETF Rank #3 with a Medium risk outlook.

PowerShares QQQ ETF QQQ

This fund is a popular ETF that maintains a hefty exposure to U.S. tech companies and tracks the Nasdaq 100 index.

It has AUM of $58.9 billion and charges a fee of 20 basis points a year. From a sector look, the fund has high exposures to Information Technology, Consumer Discretionary and Health Care with 61.1%, 20.8% and 10.4% allocation, respectively (as of Jan 3, 2017). The fund’s top three holdings are Apple Inc, Microsoft Corporation, and Amazon.com Inc with 11.8%, 8.9% and 7.7% allocation, respectively (as of Jan 3, 2017). The fund has returned 34.6% in a year. It has a Zacks ETF Rank #2 with a Medium risk outlook.

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