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5 Sector ETFs to Win From 8.6% U.S. Inflation

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The annual inflation rate in the United States unexpectedly accelerated to 8.6% in May 2022, the highest since December 1981 and compared to market forecasts as well as April’s print of 8.3%. Energy prices jumped 34.6%, the most since September 2005, due to gasoline (48.7%), fuel oil (106.7%, the largest increase on record), electricity (12%, the largest 12-month increase since August 2006), and natural gas (30.2%, the most since July 2008), per tradingeconomics.

Food costs surged 10.1%, the first increase of 10% or more since March 1981. Other increases were also seen in cost of shelter (5.5%, the most since February 1991), household furnishing and operations (8.9%), used cars and trucks (16.1%) and airline fares (37.8%) while cost of new vehicles eased slightly (12.6% vs 13.2%). Meanwhile, core inflation rate slowed for a second month to 6% compared with expectations of 5.9%, per tradingeconomics.

Against this backdrop, we suggest a few sector ETFs that can be worth investing at the time of rising inflation. Below we highlight those.

Energy

The energy sector tends to perform well in an inflationary environment. Revenues of energy stocks are dependent on energy prices, a key factor of inflation indices. The operating backdrop of the sector, too, is bullish. Oil prices have been rising since the beginning of 2022.

The upside in crude oil prices was triggered by factors like easing COVID-19 concerns, supply shortages, and geopolitical tensions in energy-rich Eastern Europe and the Middle East. SPDR S&P Oil & Gas Exploration & Production ETF (XOP - Free Report) could be a good play here.

Food & Grocery Stocks

Food-at-home inflation is rising faster than food-away-from home inflation, indicating the hot groceries market. Food companies normally pass on cost increases of raw materials to consumers to maintain the profit margin. With consumer staples or food companies being a non-cyclical sector, the sheer necessities of staples can’t even deter consumers from buying those goods. Hence, the sector should hold up well in an inflationary environment.

Food-at-home inflation was 1.4% in May over 1.0% in April while food-away-from-home inflation was 0.7% in May over 0.6% in April. Invesco Dynamic Food & Beverage ETF (PBJ - Free Report) is a good pick here.

Real Estate

Rents are increasing fast. It rose 0.6% in May versus 0.5% in April. Rising home prices also boosted the demand for real estate. Zacks Rank #2 (Buy) iShares U.S. Real Estate ETF (IYR - Free Report) should thus win.

Retail

The index for household furnishings and operations continued to rise, rising 0.4% over the month. The recreation index also rose 0.4% in May. Both increases were the same as in April. The index for apparel gained 0.7% in May after falling in April. SPDR S&P Retail ETF (XRT - Free Report) , which has a Zacks Rank #2, has an exposure to the apparel industry.

Transportation

The index for airline fares continued to shoot higher, increasing 12.6% in May after rising 18.6% the prior month. The index for used cars and trucks jumped 1.8% in May after declining in each of the three prior months. The index for new vehicles logged an uptick in May, rising 1.0% after expanding 1.1% in April. iShares U.S. Transportation ETF (IYT - Free Report) , the Zacks Rank #2, should thus studied for gains (read: Airlines ETF Stuck Between Revenue & Cost Increases).