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5 ETF Zones to Benefit as Inflation Cools in May

Inflation in the United States cooled down in May for the second consecutive month. The Consumer Price Index rose 3.3% year over year in May, down from an annual growth of 3.4% in April. On a monthly basis, prices held flat for the first time since July 2022. Though inflation is far below its peak of 9.1% in mid-2022, it remains 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 five sectors that will benefit from easing inflation. These include Consumer Discretionary Select Sector SPDR Fund XLY, Technology Select Sector SPDR Fund XLK, iShares U.S. Real Estate ETF IYR, Invesco Food & Beverage ETF PBJ and SPDR Gold Trust ETF GLD.

Behind the Inflation Numbers

Much of the relief mostly came from a drop in gasoline prices. Gas prices dropped 3.6% from April to May after rising 2.8% the previous month.

The cost of auto insurance, which has soared in recent months, also dipped 0.1% in May from April, though it’s still up more than 20% on an annual basis. Transportation services prices fell for the first time since the fall of 2021, dropping 0.5% for the month (read: Best ETF Ideas for the Second Half of 2024).

The indexes for airline fares, new vehicles, communication, recreation, and apparel were among those that decreased over the month. However, rising shelter costs and higher food prices remained causes for concern. The index for shelter rose for the fourth consecutive month by 0.4%, while the food index inched up 0.1%. The food away from home index rose 0.4% over the month, while the food at home index was unchanged.

The so-called core inflation, which strips out volatile components such as food and energy prices, rose 0.2% over the prior month, the lowest monthly core reading since June 2023, and 3.4% year over year.

ETFs to Gain

Consumer Discretionary Select Sector SPDR Fund (XLY)

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 $18.8 billion and an average daily volume of around 4 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 52 securities in its basket, with key holdings in broadline retail, hotels, restaurants and leisure, specialty retail and automobiles with a double-digit allocation each. It charges 0.09% in expense ratio and has a Zacks ETF Rank #3 (Hold).

Technology Select Sector SPDR Fund (XLK)

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: Apple Jumps on the AI Bandwagon: 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 $67.2 billion and an average daily volume of 5.5 million shares. The fund charges 9 bps in fees per year and has a Zacks ETF Rank #1 (Strong Buy).

iShares U.S. Real Estate ETF (IYR)

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 72 securities with key holdings in telecom tower REITs, retail REITs and industrial REITs. It has amassed $3 billion in its asset base while trading in a heavy volume of 6 million shares a day on average. iShares U.S. Real Estate ETF charges 40 bps in annual fees and has a Zacks ETF Rank #3.

Invesco Food & Beverage ETF (PBJ)

Cooling inflation will lead to stable or lower interest rates and could reduce the borrowing costs for food companies, making it cheaper for them to finance their operations or invest in growth.

Invesco Food & Beverage ETF offers exposure to 32 companies engaged in the manufacture, sale or distribution of food and beverage products, agricultural products and products related to the development of new food technologies. With an AUM of $114.8 million, Invesco Dynamic Food & Beverage ETF charges 57 bps in annual fees from investors and has a Zacks ETF Rank #3.

SPDR Gold Trust ETF (GLD)

The cooling inflation and potential rate cuts 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: Sector ETFs to Profit as Rate Cut Bets Rise).

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 $62 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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SPDR Gold Shares (GLD): ETF Research Reports

Technology Select Sector SPDR ETF (XLK): ETF Research Reports

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

Invesco Food & Beverage ETF (PBJ): ETF Research Reports

iShares U.S. Real Estate ETF (IYR): ETF Research Reports

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Zacks Investment Research