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5 ETF Zones to Benefit as Inflation Drops to 4% in May
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Inflation in the United States cooled down for the eleventh consecutive month in May. The Consumer Price Index revealed that headline inflation rose 0.1% over the last month and 4% year over year in May, representing a slowdown from April's 0.4% month-over-month increase and 4.9% annual gain. Though this marks the smallest yearly advance since March 2021, the headline inflation is still significantly above the Federal Reserve's 2% target.
Easing inflation indicates that the economy is stabilizing and interest rates may be declining. In such an environment, some sectors tend to perform better than others. We have highlighted ETFs from those five sectors that will benefit from easing inflation. These include Consumer Discretionary Select Sector SPDR Fund (XLY - Free Report) , Technology Select Sector SPDR Fund (XLK - Free Report) , iShares U.S. Real Estate ETF (IYR - Free Report) , First Trust Nasdaq Food & Beverage ETF (FTXG - Free Report) and SPDR Gold Trust ETF (GLD - Free Report) .
Behind the Inflation Numbers
Much of the relief came from a drop in prices for eggs, gasoline and furniture. The price of eggs has dropped 13.8% over the year-ago period — the biggest drop since 1951, while gasoline prices are down nearly 20%.
Energy prices also decreased significantly by 11.7% year over year. While this might put pressure on energy companies, it could benefit sectors that are heavy energy consumers, such as manufacturing and transportation, due to lower operating costs (read: Time for Inverse Energy ETFs?).
On the other hand, rising shelter costs and higher food prices remained causes for concern. The shelter index, which includes rent prices, saw significant increases, accounting for over 60% of the total increase in core inflation. This indicates that the real estate sector has benefited. The index for used cars and trucks increased by 4.4% for the second straight month, hinting at potential gains in the used automobile industry. There have also been steep price rises for beer, women's clothing, and services from car maintenance to school fees.
Further, overall food prices rose by 6.7% year over year, but there were significant decreases in some areas, such as egg prices, which fell by 13.8% in May.
The so-called core inflation, which strips out volatile components such as food and energy prices, rose 5.3% from the year-ago level and 0.4% over the past month.
ETFs to Gain
Consumer Discretionary Select Sector SPDR Fund (XLY - Free Report)
Lower inflation often translates into higher purchasing power for consumers, which can boost the performance of the consumer discretionary sector. These are companies that sell non-essential goods like apparel, automobiles, and entertainment. When consumers have more disposable income, they spend more on these types of goods and services. Consumer Discretionary Select Sector SPDR Fund is the largest and most popular product in this space, with AUM of $16.4 billion and an average daily volume of around 4.3 million shares.
It offers exposure to the broad consumer discretionary space and tracks the Consumer Discretionary Select Sector Index. Consumer Discretionary Select Sector SPDR Fund holds 53 securities in its basket, with key holdings in broadline retail, automobiles, specialty retail, and hotels, restaurants and leisure with a double-digit allocation each. It charges 0.10% in expense ratio and has a Zacks ETF Rank #1 (Strong Buy).
Tech companies, particularly in the growth segment, are often financed with significant debt, making them sensitive to interest rates. When inflation cools and interest rates are lower or stable, these companies can borrow more cheaply to finance their growth. This can support increased profitability and higher stock prices. As such, XLK seems a prudent choice (read: 5 ETFs Leading the Tech Outperformance in May).
Technology Select Sector SPDR Fund targets the broad technology sector and follows the Technology Select Sector Index. It holds about 64 securities in its basket and has key holdings in software, semiconductors & semiconductor equipment, and technology hardware, storage & peripherals. Technology Select Sector SPDR Fund is the most popular and heavily traded ETF, with AUM of $47.6 billion and an average daily volume of 6 million shares. The fund charges 10 bps in fees per year and has a Zacks ETF Rank #2 (Buy).
While real estate can sometimes be a good hedge against inflation, the sector often benefits from low inflation because of its sensitivity to interest rates. Lower mortgage rates can stimulate demand for property and boost home prices. Furthermore, real estate investment trusts (REITs) which often carry high levels of debt, can finance their operations more cheaply in a low-interest-rate environment.
iShares U.S. Real Estate ETF offers exposure to the country’s real estate companies and REITs, which invest in real estate directly and trade like stocks. It follows the Dow Jones U.S. Real Estate Capped Index. iShares U.S. Real Estate ETF holds a basket of 78 securities with key holdings in telecom tower REITs, industrial REITs and retail REITs. It has amassed $3 billion in its asset base while trading in a heavy volume of 5 million shares a day on average. iShares U.S. Real Estate ETF charges 39 bps in annual fees and has a Zacks ETF Rank #3 (Hold).
The overall food prices rose by 6.7%, meaning that food producers and retailers have been able to pass on higher costs to consumers, which is beneficial for their profitability. Additionally, if cooling inflation leads to stable or lower interest rates, it could reduce the borrowing costs for food companies, making it cheaper for them to finance their operations or invest in growth.
First Trust Nasdaq Food & Beverage ETF offers exposure to U.S. companies within the food and beverage industry. It tracks the Nasdaq US Smart Food & Beverage Index, holding 30 securities in its basket, with each accounting for less than 9% share. First Trust Nasdaq Food & Beverage ETF has AUM of $988.9 million and charges 60 bps in annual fees. It sees an average daily volume of about 106,000 shares and has a Zacks ETF Rank #3.
The cooling inflation and potential pause in rate hikes could be supportive of gold. Gold is highly sensitive to rising U.S. interest rates, as these increase the opportunity cost of holding non-yielding bullion (read: How to Trade the Gold Rush With ETFs).
SPDR Gold Trust ETF tracks the price of gold bullion measured in U.S. dollars and kept in London under the custody of HSBC Bank USA. It is an ultra-popular gold ETF, with AUM of $58.7 billion and a heavy volume of about 8 million shares a day. SPDR Gold Trust ETF charges 40 bps in fees per year from investors and has a Zacks ETF Rank #3.
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5 ETF Zones to Benefit as Inflation Drops to 4% in May
Inflation in the United States cooled down for the eleventh consecutive month in May. The Consumer Price Index revealed that headline inflation rose 0.1% over the last month and 4% year over year in May, representing a slowdown from April's 0.4% month-over-month increase and 4.9% annual gain. Though this marks the smallest yearly advance since March 2021, the headline inflation is still significantly above the Federal Reserve's 2% target.
Easing inflation indicates that the economy is stabilizing and interest rates may be declining. In such an environment, some sectors tend to perform better than others. We have highlighted ETFs from those five sectors that will benefit from easing inflation. These include Consumer Discretionary Select Sector SPDR Fund (XLY - Free Report) , Technology Select Sector SPDR Fund (XLK - Free Report) , iShares U.S. Real Estate ETF (IYR - Free Report) , First Trust Nasdaq Food & Beverage ETF (FTXG - Free Report) and SPDR Gold Trust ETF (GLD - Free Report) .
Behind the Inflation Numbers
Much of the relief came from a drop in prices for eggs, gasoline and furniture. The price of eggs has dropped 13.8% over the year-ago period — the biggest drop since 1951, while gasoline prices are down nearly 20%.
Energy prices also decreased significantly by 11.7% year over year. While this might put pressure on energy companies, it could benefit sectors that are heavy energy consumers, such as manufacturing and transportation, due to lower operating costs (read: Time for Inverse Energy ETFs?).
On the other hand, rising shelter costs and higher food prices remained causes for concern. The shelter index, which includes rent prices, saw significant increases, accounting for over 60% of the total increase in core inflation. This indicates that the real estate sector has benefited. The index for used cars and trucks increased by 4.4% for the second straight month, hinting at potential gains in the used automobile industry. There have also been steep price rises for beer, women's clothing, and services from car maintenance to school fees.
Further, overall food prices rose by 6.7% year over year, but there were significant decreases in some areas, such as egg prices, which fell by 13.8% in May.
The so-called core inflation, which strips out volatile components such as food and energy prices, rose 5.3% from the year-ago level and 0.4% over the past month.
ETFs to Gain
Consumer Discretionary Select Sector SPDR Fund (XLY - Free Report)
Lower inflation often translates into higher purchasing power for consumers, which can boost the performance of the consumer discretionary sector. These are companies that sell non-essential goods like apparel, automobiles, and entertainment. When consumers have more disposable income, they spend more on these types of goods and services. Consumer Discretionary Select Sector SPDR Fund is the largest and most popular product in this space, with AUM of $16.4 billion and an average daily volume of around 4.3 million shares.
It offers exposure to the broad consumer discretionary space and tracks the Consumer Discretionary Select Sector Index. Consumer Discretionary Select Sector SPDR Fund holds 53 securities in its basket, with key holdings in broadline retail, automobiles, specialty retail, and hotels, restaurants and leisure with a double-digit allocation each. It charges 0.10% in expense ratio and has a Zacks ETF Rank #1 (Strong Buy).
Technology Select Sector SPDR Fund (XLK - Free Report)
Tech companies, particularly in the growth segment, are often financed with significant debt, making them sensitive to interest rates. When inflation cools and interest rates are lower or stable, these companies can borrow more cheaply to finance their growth. This can support increased profitability and higher stock prices. As such, XLK seems a prudent choice (read: 5 ETFs Leading the Tech Outperformance in May).
Technology Select Sector SPDR Fund targets the broad technology sector and follows the Technology Select Sector Index. It holds about 64 securities in its basket and has key holdings in software, semiconductors & semiconductor equipment, and technology hardware, storage & peripherals. Technology Select Sector SPDR Fund is the most popular and heavily traded ETF, with AUM of $47.6 billion and an average daily volume of 6 million shares. The fund charges 10 bps in fees per year and has a Zacks ETF Rank #2 (Buy).
iShares U.S. Real Estate ETF (IYR - Free Report)
While real estate can sometimes be a good hedge against inflation, the sector often benefits from low inflation because of its sensitivity to interest rates. Lower mortgage rates can stimulate demand for property and boost home prices. Furthermore, real estate investment trusts (REITs) which often carry high levels of debt, can finance their operations more cheaply in a low-interest-rate environment.
iShares U.S. Real Estate ETF offers exposure to the country’s real estate companies and REITs, which invest in real estate directly and trade like stocks. It follows the Dow Jones U.S. Real Estate Capped Index. iShares U.S. Real Estate ETF holds a basket of 78 securities with key holdings in telecom tower REITs, industrial REITs and retail REITs. It has amassed $3 billion in its asset base while trading in a heavy volume of 5 million shares a day on average. iShares U.S. Real Estate ETF charges 39 bps in annual fees and has a Zacks ETF Rank #3 (Hold).
First Trust Nasdaq Food & Beverage ETF (FTXG - Free Report)
The overall food prices rose by 6.7%, meaning that food producers and retailers have been able to pass on higher costs to consumers, which is beneficial for their profitability. Additionally, if cooling inflation leads to stable or lower interest rates, it could reduce the borrowing costs for food companies, making it cheaper for them to finance their operations or invest in growth.
First Trust Nasdaq Food & Beverage ETF offers exposure to U.S. companies within the food and beverage industry. It tracks the Nasdaq US Smart Food & Beverage Index, holding 30 securities in its basket, with each accounting for less than 9% share. First Trust Nasdaq Food & Beverage ETF has AUM of $988.9 million and charges 60 bps in annual fees. It sees an average daily volume of about 106,000 shares and has a Zacks ETF Rank #3.
SPDR Gold Trust ETF (GLD - Free Report)
The cooling inflation and potential pause in rate hikes could be supportive of gold. Gold is highly sensitive to rising U.S. interest rates, as these increase the opportunity cost of holding non-yielding bullion (read: How to Trade the Gold Rush With ETFs).
SPDR Gold Trust ETF tracks the price of gold bullion measured in U.S. dollars and kept in London under the custody of HSBC Bank USA. It is an ultra-popular gold ETF, with AUM of $58.7 billion and a heavy volume of about 8 million shares a day. SPDR Gold Trust ETF charges 40 bps in fees per year from investors and has a Zacks ETF Rank #3.