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Inflation Drops Below 5% Since 2022: ETFs Set to Gain
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Inflation in the United States slowed down for the tenth consecutive month in April. The consumer price index rose 4.9% in April, down from a 5% rise in March and a 40-year high of 9.1% last June. This is the smallest yearly increase since April 2021. On a monthly basis, prices rose 0.4% following a 0.1% increase in March.
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 typically 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) , SPDR Gold Trust ETF (GLD - Free Report) and AdvisorShares Restaurant ETF (EATZ - Free Report) .
Behind the Inflation Numbers
Much of the relief came from a drop in prices for milk, airline tickets and new cars. However, rising shelter costs and higher food prices remained causes for concern. Shelter costs, accounting for more than one-third of the index, rose 0.4% over the month and 8.1% in the past year (read: Oil Under Pressure: Sector ETFs to Benefit/Lose).
Though the price of food at home declined a modest 0.2% from last month, the cost of eating out rose by 0.4% over the past month and 8.6% year over year. Gasoline prices declined 12.2% year over year but rose 3% from the last month.
The so-called core inflation, which strips out volatile components such as food and energy prices, rose 5.5% from the year-ago level after a 5.6% advance in March. Inflation climbed 0.4% over the last month.
ETFs to Gain
Consumer Discretionary Select Sector SPDR Fund (XLY - Free Report)
As inflation eases, consumers tend to have more disposable income, which can lead to higher spending on non-essential goods and services. Companies in the consumer discretionary sector, such as retail, travel, leisure, and luxury goods, can benefit from this increased demand. Consumer Discretionary Select Sector SPDR Fund is the largest and most popular product in this space, with AUM of $5.4 billion and an average daily volume of around 4.5 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, specialty retail, hotels, restaurants and leisure, and automobiles with a double-digit allocation each. It charges 0.10% in expense ratio and has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook.
Technology companies often have higher profit margins and lower capital expenditure requirements compared to other sectors. They may be less affected by inflation and can continue to grow during periods of easing inflation. As such, XLK seems a prudent choice. 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, technology hardware, storage & peripherals, semiconductors & semiconductor equipment and IT services.
Technology Select Sector SPDR Fund is the most popular and heavily traded ETF, with AUM of $43.6 billion and an average daily volume of 7 million shares. The fund charges 10 bps in fees per year and has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.
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 $1.9 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 in annual fees and trades in a heavy volume of around 2 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: Is the Worst Over for Homebuilder Stocks & ETFs?).
The cooling inflation might compel Fed to put a pause on rate hikes. 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 support 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 $60.1 billion and a heavy volume of about 9 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 (read: Why Investors Are Flocking to Gold ETFs).
Restaurants will benefit as more consumers eat out. AdvisorShares Restaurant ETF is actively managed and the only fund 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 25 securities in its basket with a higher concentration on the top firm.
AdvisorShares Restaurant ETF gathered $2.6 million in its asset base. EATZ charges 99 bps as annual fees and trades in an average daily volume of 700 shares.
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Inflation Drops Below 5% Since 2022: ETFs Set to Gain
Inflation in the United States slowed down for the tenth consecutive month in April. The consumer price index rose 4.9% in April, down from a 5% rise in March and a 40-year high of 9.1% last June. This is the smallest yearly increase since April 2021. On a monthly basis, prices rose 0.4% following a 0.1% increase in March.
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 typically 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) , SPDR Gold Trust ETF (GLD - Free Report) and AdvisorShares Restaurant ETF (EATZ - Free Report) .
Behind the Inflation Numbers
Much of the relief came from a drop in prices for milk, airline tickets and new cars. However, rising shelter costs and higher food prices remained causes for concern. Shelter costs, accounting for more than one-third of the index, rose 0.4% over the month and 8.1% in the past year (read: Oil Under Pressure: Sector ETFs to Benefit/Lose).
Though the price of food at home declined a modest 0.2% from last month, the cost of eating out rose by 0.4% over the past month and 8.6% year over year. Gasoline prices declined 12.2% year over year but rose 3% from the last month.
The so-called core inflation, which strips out volatile components such as food and energy prices, rose 5.5% from the year-ago level after a 5.6% advance in March. Inflation climbed 0.4% over the last month.
ETFs to Gain
Consumer Discretionary Select Sector SPDR Fund (XLY - Free Report)
As inflation eases, consumers tend to have more disposable income, which can lead to higher spending on non-essential goods and services. Companies in the consumer discretionary sector, such as retail, travel, leisure, and luxury goods, can benefit from this increased demand. Consumer Discretionary Select Sector SPDR Fund is the largest and most popular product in this space, with AUM of $5.4 billion and an average daily volume of around 4.5 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, specialty retail, hotels, restaurants and leisure, and automobiles with a double-digit allocation each. It charges 0.10% in expense ratio and has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook.
Technology Select Sector SPDR Fund (XLK - Free Report)
Technology companies often have higher profit margins and lower capital expenditure requirements compared to other sectors. They may be less affected by inflation and can continue to grow during periods of easing inflation. As such, XLK seems a prudent choice. 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, technology hardware, storage & peripherals, semiconductors & semiconductor equipment and IT services.
Technology Select Sector SPDR Fund is the most popular and heavily traded ETF, with AUM of $43.6 billion and an average daily volume of 7 million shares. The fund charges 10 bps in fees per year and has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.
iShares U.S. Home Construction ETF (ITB - Free Report)
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 $1.9 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 in annual fees and trades in a heavy volume of around 2 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: Is the Worst Over for Homebuilder Stocks & ETFs?).
SPDR Gold Trust ETF (GLD - Free Report)
The cooling inflation might compel Fed to put a pause on rate hikes. 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 support 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 $60.1 billion and a heavy volume of about 9 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 (read: Why Investors Are Flocking to Gold ETFs).
AdvisorShares Restaurant ETF (EATZ - Free Report)
Restaurants will benefit as more consumers eat out. AdvisorShares Restaurant ETF is actively managed and the only fund 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 25 securities in its basket with a higher concentration on the top firm.
AdvisorShares Restaurant ETF gathered $2.6 million in its asset base. EATZ charges 99 bps as annual fees and trades in an average daily volume of 700 shares.