Sector ETFs Likely to Gain on May Inflation Data

Consumer prices in the United States rose modestly in May, indicating that President Donald Trump’s tariffs have not yet had a significant impact on inflation, according to the Bureau of Labor Statistics (BLS) report released Wednesday.

The Consumer Price Index (CPI) increased by just 0.1% in May, falling short of the 0.2% monthly increase forecasted by a Dow Jones survey, as quoted on CNBC. This puts the annual inflation rate at 2.4%, matching economists’ expectations for the year.

Excluding the volatile food and energy categories, the core CPI also rose by 0.1% for the month, bringing the year-over-year rate to 2.8%. These figures were lower than forecasts of 0.3% and 2.9%, respectively.

Energy and Vehicle Prices Decline

A continued decline in energy prices helped offset some of the monthly inflation. Energy prices dropped 1% in May, with gasoline falling by 2.6%, pushing its annual decline to 12%. Meanwhile, new and used vehicle prices fell by 0.3% and 0.5%, respectively—despite expectations that tariffs might drive these categories higher.

Against this backdrop, below we highlight a few sector-based exchange-traded funds (ETFs) that may gain in the near term.

Sector ETFs to Gain

Technology – Technology Select Sector SPDR ETF (XLK)

Given the muted inflation, market expectations suggest the Federal Reserve will wait until at least September before considering interest rate cuts. Trump continues to pressure the Fed to act, citing both easing inflation and signs of labor market softness. Still, low rates are expected to boost high-growth sectors like technology.

The underlying Technology Select Sector Index includes companies from the following industries: computers & peripherals; software; diversified telecommunication services; communications equipment; semiconductor & semiconductor equipment; internet software & services; IT services; wireless telecommunication services; electronic equipment & instruments; and office electronics. The fund charges 8 bps in fees and yields 0.65% annually.

Healthcare – iShares U.S. Medical Devices ETF (IHI)

The index for the medical care commodities rose 0.6% sequentially in May. The index has advanced 0.3% annually.

The underlying Dow Jones U.S. Select Medical Equipment Index measures the performance of the medical equipment sector of the U.S. equity market. The fund charges 40 bps in fees and yields 0.44% annually.

Restaurants – AdvisorShares Restaurant ETF EATZ

The index for the food away from home increased 0.3% sequentially and 2.2% annually in May. However, the gains were higher than the 2.9% annual increase in the food at home index. This disparity may encourage some consumers to opt for eating out. Overall, food prices rose 0.3% on the month. We also expect the restaurants to pass on the increased costs to consumers.

The EATZ ETF is an actively managed exchange-traded fund that seeks to achieve its investment objective by investing at least 80% of its net assets in securities of companies that derive at least 50% of their net revenue from the restaurant business. The fund charges 99 bps in fees and yields 0.17% annually.

Real Estate – Real Estate Select Sector SPDR ETF XLRE

Weighted shelter makes up 32.77% of CPI, of which 7.8% is rent and 23.68% is private housing, per data from MacroMicro. The shelter index jumped 0.3% in May. Costs increased 3.9% annually. The annual shelter inflation rate slowed to its lowest since late 2021.

The underlying Real Estate Select Sector Index includes securities of companies from the following industries real estate management and development and REITs, excluding mortgage REITs. The fund yields 3.31% annually and charges 8 bps in fees.

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This article originally published on Zacks Investment Research (zacks.com).

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