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Inflation in the United States rose for the first time in July after 12 straight months of decline. The Consumer Price Index rose 3.2% year over year, up from an annual increase of 3% in June, which was the lowest rate in over two years.
Although inflation is still significantly above the Federal Reserve's 2% target, it has dropped from a peak of 9.1%. On a month-over-month basis, prices increased by 0.2% in July, consistent with June's growth. Investors should note that a pickup in inflation came as it was calculated from a lower base after prices subsided last July.
Overall, inflation has been on a downtrend path, bolstering expectations that the Federal Reserve is at the end of its rate hike cycle. 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 (read: ETFs to Gain as Fed Raises Rates to a 22-Year High).
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. Home Construction ETF (ITB - Free Report) , First Trust Nasdaq Food & Beverage ETF (FTXG - Free Report) and SPDR Gold Trust ETF (GLD - Free Report) .
Behind the Inflation Numbers
The rise in consumer prices was driven by costlier housing and a jump in gasoline prices. The shelter index, which accounts for two-thirds of the inflation index, advanced 7.7% year over year. Meanwhile, gasoline prices surged nearly 30 cents over the past month to a national average of $3.83 a gallon, according to AAA. With gasoline prices rising slightly, the cost of energy products edged up 0.1%,
Food prices gained 0.2%. Grocery food prices increased 0.3% after remaining unchanged in June. They were boosted by higher prices for eggs, beef, dairy as well as fruits and vegetables.
The so-called core inflation, which strips out volatile components such as food and energy prices, rose 4.7% from the year-ago level and 0.2% over the past month, roughly on par with June. The annual core inflation was the smallest monthly increase since October 2021.
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 $17.5 billion and an average daily volume of around 5 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, hotels, restaurants and leisure, automobiles, and specialty retail 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 Beaten-Down Tech ETFs to Buy).
Technology Select Sector SPDR Fund targets the broad technology sector and follows the Technology Select Sector Index. It holds about 65 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 $49 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 #1.
Homebuilder ETF will get a dual advantage from easing inflation and a higher shelter cost. Falling inflation will keep the mortgage rates low, making home ownership less expensive for first-time buyers, while higher shelter costs will provide homebuilders an edge to negotiate well. iShares U.S. Home Construction ETF provides exposure to U.S. companies that manufacture residential homes by tracking the Dow Jones U.S. Select Home Construction Index.
With an AUM of $2.5 billion, it holds a basket of 48 stocks, with a heavy concentration on the top two firms. iShares U.S. Home Construction ETF charges 40 bps in annual fees and trades in a heavy volume of around 2.5 million shares a day on average. iShares U.S. Home Construction ETF has a Zacks ETF Rank #2 (Buy).
The food prices is rising though slightly, 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 (read: Coke, PepsiCo Earnings Should Drive Consumer Staples ETFs).
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 $1 billion and charges 60 bps in annual fees. It sees an average daily volume of about 105,000 shares and has a Zacks ETF Rank #3 (Hold).
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.
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 $56 billion and a heavy volume of about 5 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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Inflation Moderates in July: ETFs to Gain
Inflation in the United States rose for the first time in July after 12 straight months of decline. The Consumer Price Index rose 3.2% year over year, up from an annual increase of 3% in June, which was the lowest rate in over two years.
Although inflation is still significantly above the Federal Reserve's 2% target, it has dropped from a peak of 9.1%. On a month-over-month basis, prices increased by 0.2% in July, consistent with June's growth. Investors should note that a pickup in inflation came as it was calculated from a lower base after prices subsided last July.
Overall, inflation has been on a downtrend path, bolstering expectations that the Federal Reserve is at the end of its rate hike cycle. 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 (read: ETFs to Gain as Fed Raises Rates to a 22-Year High).
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. Home Construction ETF (ITB - Free Report) , First Trust Nasdaq Food & Beverage ETF (FTXG - Free Report) and SPDR Gold Trust ETF (GLD - Free Report) .
Behind the Inflation Numbers
The rise in consumer prices was driven by costlier housing and a jump in gasoline prices. The shelter index, which accounts for two-thirds of the inflation index, advanced 7.7% year over year. Meanwhile, gasoline prices surged nearly 30 cents over the past month to a national average of $3.83 a gallon, according to AAA. With gasoline prices rising slightly, the cost of energy products edged up 0.1%,
Food prices gained 0.2%. Grocery food prices increased 0.3% after remaining unchanged in June. They were boosted by higher prices for eggs, beef, dairy as well as fruits and vegetables.
The so-called core inflation, which strips out volatile components such as food and energy prices, rose 4.7% from the year-ago level and 0.2% over the past month, roughly on par with June. The annual core inflation was the smallest monthly increase since October 2021.
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 $17.5 billion and an average daily volume of around 5 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, hotels, restaurants and leisure, automobiles, and specialty retail 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 Beaten-Down Tech ETFs to Buy).
Technology Select Sector SPDR Fund targets the broad technology sector and follows the Technology Select Sector Index. It holds about 65 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 $49 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 #1.
iShares U.S. Home Construction ETF (ITB - Free Report)
Homebuilder ETF will get a dual advantage from easing inflation and a higher shelter cost. Falling inflation will keep the mortgage rates low, making home ownership less expensive for first-time buyers, while higher shelter costs will provide homebuilders an edge to negotiate well. iShares U.S. Home Construction ETF provides exposure to U.S. companies that manufacture residential homes by tracking the Dow Jones U.S. Select Home Construction Index.
With an AUM of $2.5 billion, it holds a basket of 48 stocks, with a heavy concentration on the top two firms. iShares U.S. Home Construction ETF charges 40 bps in annual fees and trades in a heavy volume of around 2.5 million shares a day on average. iShares U.S. Home Construction ETF has a Zacks ETF Rank #2 (Buy).
First Trust Nasdaq Food & Beverage ETF (FTXG - Free Report)
The food prices is rising though slightly, 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 (read: Coke, PepsiCo Earnings Should Drive Consumer Staples ETFs).
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 $1 billion and charges 60 bps in annual fees. It sees an average daily volume of about 105,000 shares and has a Zacks ETF Rank #3 (Hold).
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.
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 $56 billion and a heavy volume of about 5 million shares a day. SPDR Gold Trust ETF charges 40 bps in fees per year from investors and has a Zacks ETF Rank #3.