Americans are feeling optimistic about the economy, given stabilizing inflation. This is especially true as consumer sentiment rose to a four-month high in early September. Rising consumer sentiment bodes well for household spending in the coming months. It is expected to have a positive impact on the consumer discretionary sector, which attracts a major portion of consumer spending (read: 5 ETF Zones Set to Benefit When Fed Initiates Rate Cuts). 

Investors can tap the encouraging trend in the basket form through consumer discretionary ETFs like Consumer Discretionary Select Sector SPDR Fund XLY, Vanguard Consumer Discretionary ETF VCR, Fidelity MSCI Consumer Discretionary Index ETF FDIS, First Trust Consumer Discretionary AlphaDEX Fund FXD and iShares U.S. Consumer Services ETF IYC. These funds have a Zacks ETF Rank #3 (Hold).

The latest University of Michigan consumer sentiment index climbed 1.6% to 69 from 67.9 in August. Sentiment is now about 40% above its June 2022 low, though consumers remain cautious ahead of the November presidential election.

Inflation is easing and growing expectations of lower interest rates are making people feel better about the outlook for the economy. Inflation rose at the slowest pace in three years in August, raising consumer confidence. Year-ahead inflation expectations also edged down to 2.7% in September from 2.8% in August. Meanwhile, the Fed is expected to initiate the first interest rate cut since 2020 in its meeting, scheduled to start today. Markets are pricing in 50% chances of a 50-bps rate cut and 50% odds of a 25-bps rate cut, according to CME Group's FedWatch tool.

The combination of both will increase the spending power of the consumers, lifting consumer discretionary stocks (read: 5 Growth ETFs to Buy as Inflation Drops to a 3-Year Low).

Consumer Discretionary Select Sector SPDR Fund (XLY) 

Consumer Discretionary Select Sector SPDR Fund offers exposure to the broad consumer discretionary space and tracks the Consumer Discretionary Select Sector Index. It holds 52 securities in its basket, with key holdings in specialty retail, hotels, restaurants and leisure, broadline retail and automobiles with a double-digit allocation each.

Consumer Discretionary Select Sector SPDR Fund is the largest and most popular product in this space, with AUM of $18.2 billion and an average daily volume of around 3 million shares. It charges 0.09% in expense ratio.

Vanguard Consumer Discretionary ETF (VCR) 

Vanguard Consumer Discretionary ETF follows the MSCI U.S. Investable Market Consumer Discretionary 25/50 Index and holds 303 stocks in its basket. In terms of industrial exposure, broadline retail, automobile manufacturers and restaurants occupy the top three spots. 

Vanguard Consumer Discretionary ETF is the low-cost choice in the space, charging investors only 10 bps in annual fees while volume is good at nearly 55,000 shares a day. The fund has managed $5.5 billion in its asset base so far.

Fidelity MSCI Consumer Discretionary Index ETF (FDIS)

Fidelity MSCI Consumer Discretionary Index ETF tracks the MSCI USA IMI Consumer Discretionary Index, holding 274 stocks in its basket. It has key holdings in broadline retail, hotels, restaurants and, leisure and specialty retail (see: all the Consumer Discretionary ETFs here).

Fidelity MSCI Consumer Discretionary Index ETF has amassed $1.7 billion in its asset base while trading in a good volume of around 139,000 shares a day on average. It charges 8 bps in annual fees from investors.

First Trust Consumer Discretionary AlphaDEX Fund (FXD) 

First Trust Consumer Discretionary AlphaDEX Fund follows an AlphaDEX methodology and ranks stocks in the space by various growth and value factors, eliminating the bottom-ranked 25% of the stocks. This approach results in a basket of 119 stocks with retailers, travel and leisure, media    and personal goods taking double-digit exposure each. 

First Trust Consumer Discretionary AlphaDEX has an AUM of $1.4 billion and trades in a volume of 48,000 shares per day on average. It charges a higher 61 bps in annual fees.

iShares U.S. Consumer Services ETF (IYC)

iShares U.S. Consumer Discretionary ETF offers exposure to U.S. companies that distribute food, drugs, general retail items and media by tracking the Russell 1000 Consumer Disc 40 Act 15/22.5 Daily Capped Index. It holds 174 stocks in its basket, with key holdings in consumer discretionary, consumer services, media & entertainment, consumer staples distribution & retail, and autos & components.

iShares U.S. Consumer Discretionary ETF has amassed $993.7 million in its asset base and trades in a moderate volume of 130,000 shares a day on average. It charges 39 bps in annual fees from investors.

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Consumer Discretionary Select Sector SPDR ETF (XLY): ETF Research Reports

Vanguard Consumer Discretionary ETF (VCR): ETF Research Reports

Fidelity MSCI Consumer Discretionary Index ETF (FDIS): ETF Research Reports

First Trust Consumer Discretionary AlphaDEX ETF (FXD): ETF Research Reports

iShares U.S. Consumer Discretionary ETF (IYC): ETF Research Reports

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