The Diminishing 'Wealth Effect' and Your ETFs
NEW YORK ( ETF Expert) -- In previous years, consumers spent more money when the value of their 401(k)s and the value of their homes were rising. That goes a long way toward explaining the performance of the third best sub-sector ETF on a rolling five-year basis.
The idea that we tend to spend more when our chief assets are climbing is known as the "wealth effect." There was a time when leading economists estimated that we were likely to spend 3 cents for every $1 gain in stock portfolios as well as 8 cents on every $1 gain of home price appreciation.
The chairman of the U.S. Federal Reserve, Ben Bernanke, still believes in those metrics... at least conceptually. He recently told Congress the Fed's quantitative easing efforts to depress interest rates lead to economic growth via consumer spending as well as business hiring. Even a number of investors must believe in the notion of increased consumer spending, or they wouldn't have bid up the prices on XRT over the last five years.
|5 Best Performing Sub-Sector ETFs (2/1/2008-1/31/2013)|
|5 Yr % Annualized|
|PowerShares DJ Pharmaceuticals (PJP)||17.4%|
|First Trust NYSE Arca Biotech (FBT)||16.6%|
|SPDR S&P Retail (XRT)||16.1%|
|First Trust DJ Internet (FDN)||13.4%|
|iShares FTSE NAREIT Residential Real Estate (REZ)||9.0%|
|S&P 500 SPDR Trust (SPY)||4.0%|
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