Investing

ETF Areas in Focus as US Credit Card Balance Crosses $1T

Sanghamitra Saha

Published: August 11, 2023 11:26 pm

Last Updated: August 14, 2023 12:28 pm

The New York Federal Reserve’s report highlighted a significant increase in aggregate credit card balances, surpassing the $1 trillion mark for the first time, as quoted on CNBC.

With total indebtedness growing more than 4% in the April-through-June period, consumers are turning to credit cards to manage their financial needs. This rise in balances could be attributed to factors like inflationary pressures as well as increased consumption levels.

However,the latest surge in credit card balances has far-reaching implications across various sectors of the economy. The effects are not limited to the financial industry alone. Let’s delve a little deeper.

Payment Market is Likely to Fetch Fat Returns Now

Payment companies’ business models are inflation friendly. Merchants are charged a percentage of every card transaction. As the price of goods and services rises, bill amounts also go up and companies like American Express AXP, Visa V and Mastercard MA get a share of fatter bills. ETFMG Prime Mobile Payments ETF IPAY should stand to gain on this trend.

Technology and Fintech: A Winner Too?

Fintech companies providing digital payment solutions may experience growth as consumers turn to alternative payment methods. This shift can drive innovation and competition in the fintech sector, leading to advancements in digital wallets, payment apps, and contactless transactions. Global X FinTech ETF FINX should thus be in focus now.

Real Estate: Demand for Renting to Rise?

The rise in credit card balances could indirectly affect the mortgage market. Consumers with higher credit card debt might face challenges in securing favorable interest rates in the mortgage market, potentially not being able to buy a home.Theymight have to opt for rental accommodations instead of homeownership. This puts the spotlight on Vanguard Real Estate ETF VNQ.

A Rally in Consumer Discretionary Coming to an End?

Credit card delinquencies have also been witnessing an upward trend, a sign that consumers are feeling the pinch of high prices. Delinquency Rate refers to the percentage of loans in a lending portfolio for which payments are due.

While spending has been high in the consumer sector so far, the winning trend may falter as lingering economic uncertainty and sticky inflation might lead to cautious spending ahead.

Consumers’ willingness to make luxury purchases may fall and only the essential staples items should see a surge in sales. Hence, Consumer Discretionary Select Sector SPDR ETF XLY and Consumer Staples Select Sector SPDR ETF XLP are both in focus for different reasons.

Banks in Tight Spot?

As delinquency rates are going up, banks will gradually be put in a tight spot. In any case, the banking crisis in the United States is intense this year. Rising short-term rates along with the distressed commercial real estate market spell trouble for banks. If households start delaying credit card payments, bank ETFs like SPDR S&P Bank ETF KBE may fall ahead.
Mastercard Incorporated (MA): Free Stock Analysis Report

Visa Inc. (V): Free Stock Analysis Report

American Express Company (AXP): Free Stock Analysis Report

Vanguard Real Estate ETF (VNQ): ETF Research Reports

Consumer Staples Select Sector SPDR ETF (XLP): ETF Research Reports

SPDR S&P Bank ETF (KBE): ETF Research Reports

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

Global X FinTech ETF (FINX): ETF Research Reports

ETFMG Prime Mobile Payments ETF (IPAY): ETF Research Reports

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