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Inflation Cools Down in February: ETFs to Consider

Inflation in the United States cooled down in February as the consumer price index rose 0.4% in the month, following a 0.5% increase in January. Annual inflation dropped from 6.4% to 6%, the smallest annual gain since September 2021, and is now down by one-third from its peak of more than 9% in June last year.

This has put the spotlight on ETFs like SPDR Gold Trust ETF GLD, iShares U.S. Home Construction ETF ITB, First Trust Nasdaq Food & Beverage ETF FTXG, AdvisorShares Restaurant ETF EATZ and iShares U.S. Transportation ETF IYT.

Behind the Inflation Numbers

While annual inflation has been on a downtrend for eight consecutive months, the so-called core inflation, which strips out volatile components such as food and energy prices, increased 0.5% after rising 0.4% in January. Rising shelter costs, food prices and higher costs for airplane flights are behind the increase.

Shelter costs, accounting for more than one-third of the index, rose 0.8% over the month and 8.1% over the last year. Meanwhile, the price of food at home rose a modest 0.3% and was up 10.2% from a year earlier, while the cost of eating out rose by 0.6% over the past month and 8.4% year over year. Transport services cost rose 1.1% from last month (read: Low-Risk ETFs Roar Amid Bank-Led Market Sell-Off).

Cooling inflation coupled with the regional banking scare increased the odds that the Fed will implement a modest 25-bps rate hike at the conclusion of its two-day policy meeting on Mar 22. Financial markets have now priced in a 74.5% likelihood that the central bank will raise the Fed funds target rate by an additional 25 bps at the meeting later this month.

ETFs in Focus

SPDR Gold Trust ETF (GLD)

The slowdown in inflation growth will keep the Fed on a slow interest-rate increase path. Gold is highly sensitive to rising U.S. interest rates, as these increase the opportunity cost of holding non-yielding bullion. A slowdown in the pace of rate hikes will provide some lift to the yellow metal.

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 $55 billion and a heavy volume of about 5.7 million shares a day. SPDR Gold Trust ETF charges 40 bps in fees per year from investors and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

iShares U.S. Home Construction ETF (ITB)

Homebuilder ETF will get a dual advantage from falling 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 $1.5 billion, it holds a basket of 48 stocks with a heavy concentration on the top two firms. iShares U.S. Home Construction ETF charges 39 bps of annual fees and trades in a heavy volume of around 2.7 million shares a day on average. iShares U.S. Home Construction ETF has a Zacks ETF Rank #4 (Sell) with a High risk outlook (read: Could Housing ETFs Spring Up in the Key Selling Season?).

First Trust Nasdaq Food & Beverage ETF (FTXG)

This ETF will continue to get a boost from rising food prices. 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 8.2% 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 167,000 shares and has a Zacks ETF Rank #3.

AdvisorShares Restaurant ETF (EATZ)

AdvisorShares Restaurant ETF is an actively managed and the only ETF investing exclusively in the restaurant and foodservice industry, including restaurants, bars, pubs, fast food, take-out facilities, food catering services and more. AdvisorShares Restaurant ETF holds 31 securities in its basket with a higher concentration on the top firm.

AdvisorShares Restaurant ETF gathered $2.4 million in its asset base. EATZ charges 99 bps as annual fees and trades in an average daily volume of 600 shares.

iShares U.S. Transportation ETF (IYT)

Rising transportation service cost is good for the sector. iShares U.S. Transportation ETF tracks the S&P Transportation Select Industry FMC Capped Index, giving investors exposure to a small basket of 49 securities. From a sector perspective, air freight & logistics, and railroads take the largest share at 32% and 28.4%, respectively, while trucking and airlines round off the next two spots with a double-digit exposure each (read: Transport ETFs Showing Strength on Q4 Earnings Results).

iShares U.S. Transportation ETF has accumulated $821.1 million in its asset base and sees a solid trading volume of around 154,000 shares a day. It charges 39 bps in annual fees and has a Zacks ETF Rank #2 (Buy) with a High risk outlook.

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SPDR Gold Shares (GLD): ETF Research Reports

iShares U.S. Transportation ETF (IYT): ETF Research Reports

iShares U.S. Home Construction ETF (ITB): ETF Research Reports

First Trust NASDAQ Food & Beverage ETF (FTXG): ETF Research Reports

AdvisorShares Restaurant ETF (EATZ): ETF Research Reports

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Zacks Investment Research