Consumers Cautious in Holiday Season: ETFs to Win/Lose

U.S. holiday retail sales are projected to reach $1.01-$1.02 trillion, a 3.7-4.2% increase, marking the first time sales will exceed $1 trillion, despite underlying consumer caution. This season is characterized by consumers prioritizing goods over services, which is expected to benefit broader retail and discretionary goods ETFs (e.g., XLY) while posing headwinds for services-focused funds like restaurant and travel ETFs (e.g., EATZ, AWAY). Online sales are forecast to grow 5.3% to $253.4 billion, with trends like Buy Now Pay Later and generative AI adoption further boosting online retail (ONLN), FinTech (BPAY), and AI-focused (CHAT) ETFs.

Analysis

The upcoming holiday season is projected to see U.S. retail sales reach an unprecedented $1.01 trillion to $1.02 trillion, marking the first time sales will exceed the trillion-dollar threshold. This represents a growth of 3.7% to 4.2% over 2024, a slight deceleration from last year's 4.3% increase, attributed to lingering economic concerns and the prior federal government shutdown.

Despite this overall growth, consumer sentiment remains cautious, with lower-income consumers prioritizing essentials. NRF data indicates a significant shift in spending patterns, favoring goods over services, such as recreation, travel, and dining out. This trend suggests potential headwinds for services-focused ETFs like AdvisorShares Restaurant ETF (EATZ) and Amplify Travel Tech ETF (AWAY), while broader retail and discretionary goods ETFs, such as Consumer Discretionary Select Sector SPDR ETF (XLY), are positioned for outperformance.

Online sales are expected to be a key driver, with Adobe forecasting a 5.3% year-over-year increase to $253.4 billion for the holiday season. Emerging trends like Buy Now Pay Later (BNPL) are anticipated to contribute an additional $2 billion to online spend, benefiting FinTech ETFs like iShares FinTech Active ETF (BPAY). Furthermore, the increasing use of generative AI for shopping plans highlights potential growth for AI-focused investment vehicles such as Roundhill Generative AI & Technology ETF (CHAT), alongside ProShares Online Retail ETF (ONLN).

Key Decisions for Investors

• Consider overweighting broader retail and discretionary goods ETFs (e.g., XLY) given the consumer shift from services to goods.
• Evaluate exposure to services-oriented ETFs (e.g., EATZ, AWAY) for potential underperformance due to cautious consumer spending in these segments.
• Monitor online retail (e.g., ONLN), FinTech (e.g., BPAY), and AI-focused (e.g., CHAT) ETFs for growth opportunities driven by digital trends and technological adoption during the holiday season.