U.S. Economy Grows 3.1% in Q3: ETFs to Play

The U.S. economy expanded at an annual rate of 3.1% from July through September, driven by strong consumer spending and increased exports, according to the Commerce Department’s revised estimate. This marks an acceleration from 3.0% growth in the second quarter, despite high interest rates.

Consumer Spending Leads the Charge

Consumer spending, which makes up about two-thirds of U.S. economic activity, grew at a robust 3.7% annual rate in the third quarter. This was an improvement from the previous estimate of 3.5% and the fastest pace since the first quarter of 2023.

Notable Gains in Exports and Equipment Investment

Exports jumped 9.6%, contributing significantly to growth. Business investment saw a modest 0.8% increase overall though investment in equipment rose sharply by 10.8%. Federal government spending jumped by 8.9%, including a noteworthy 13.9% rise in defense expenditures.

Inflation Trends Show Improvement

The Federal Reserve’s preferred inflation gauge, the personal consumption expenditures (PCE) index, rose at a modest 1.5% annual rate in Q3, down from 2.5% in the previous quarter. Core PCE inflation, which bars food and energy prices, increased by 2.2%, a decline from the 2.8% rate in the April-June quarter.

Inside the GDP Growth Forecast

RBC Capital Markets expects 2% to 3% U.S. economic growth in 2025. Bank of America’s equity and quantitative strategy team projects the U.S. economy to grow at an annualized rate of 2.4% in 2025, higher than the Bloomberg consensus forecast of 2.1% growth, as quoted on Yahoo Finance.

ETFs to Play

Against this backdrop, below we highlight few exchange-traded funds (ETFs) that could gain in light of U.S. economic growth.

iShares Russell 2000 ETF (IWM)

Currently, the U.S. economy remains strong, with inflation showing a cooling trend and earnings continuing to grow. The U.S. dollar remains strong. A strong dollar provides an edge to domestic-focused companies as small caps do not have much exposure to the international market. Plus, Trump’s “America First” agenda should also continue to favor small-cap stocks. Small-cap ETF Zacks Rank #2 (Buy) IWM is a good pick here.

SPDR S&P Retail ETF (XRT)

A measure of the economy’s underlying strength — including consumer spending and private investment while excluding volatile items like exports and government spending — grew at a solid 3.4% annual rate in Q3, up from 2.7% in the second quarter. Upbeat consumer spending is a plus for retail ETFs like XRT. The XRT ETF has a Zacks Rank #3 (Hold) (read: 5 ETFs for Smart Holiday Season Investing).

SPDR Portfolio S&P 500 High Dividend ETF (SPYD)

Per several analysts, value stocks tend to outperform in periods of stronger GDP growth. Plus, the second Trump era and protectionist policies may drive up inflation in 2025. This scenario is likely to keep bond yields higher (read: Will Strong GDP Growth Drive Value ETFs in 2025?).

Value stocks have strong current cash flows that are more likely to grow slowly or diminish over time. Therefore, when valuing stocks using the discounted cash flow method, in times of higher interest rates, value stocks are less negatively impacted than growth stocks. The Zacks Rank #1 (Strong Buy) ETF SPYD yields 3.04% annually.

iShares Core S&P Total U.S. Stock Market ETF (ITOT)

Per RBC Capital’s Calvasina work, when GDP growth ranged between 2.1% and 3%, stocks gained 70% of the time, with an average return of nearly 11%, as quoted on Yahoo Finance. This puts focus on the all-cap blend ETFs like ITOT. The ETF has a Zacks Rank #2.