Inflation in the United States softened in May. The Consumer Price Index rose just 0.1% year over year last month, putting the annual inflation rate at 2.4%. The inflation is down from April’s 0.2% increase. Core inflation, which strips out volatile food and energy prices, was 2.8%, flat year over year, well below its peaks in 2022 and 2023. Monthly core prices increased just 0.1%, against expectations of a 0.3% gain.
The data has temporarily cooled fears of an aggressive inflationary breakout, especially in the face of uncertainty surrounding President Trump’s tariffs. It might prompt a more dovish Fed stance, reinforcing market expectations for stable interest rates.
Behind the Numbers
Declines in energy and vehicle prices helped offset increases in other categories. Energy prices fell 1% in May, with gasoline prices down 2.6%, marking the 12th consecutive year-over-year decline. New and used vehicle prices declined 0.3% and 0.5%, respectively (read: Oil Prices Rebound: Can the ETF Rally Last?).
In contrast, food and shelter prices rose 0.3% each, with shelter being identified by the BLS as the "primary factor" behind the modest CPI increase. Egg prices dropped 2.7% in May but were 41.5% higher than a year ago. Apparel prices fell 0.4%, defying concerns of tariff-driven increases.
Shelter inflation, while still rising, posted its lowest annual rate (3.9%) since late 2021.
ETFs to Gain
That being said, many sectors stand to benefit from this cooling inflation trend. Below, we have highlighted ETFs from these sectors:
Consumer Discretionary
Lower inflation often translates into higher purchasing power for consumers, thus boosting the performance of the consumer discretionary sector. Consumer Discretionary Select Sector SPDR Fund XLY is the largest and most popular product in this space, with AUM of $21.7 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 51 securities in its basket, with key holdings in hotels, restaurants and leisure, broadline retail, specialty retail and automobiles with a double-digit allocation each. It charges 8 bps in annual fees and has a Zacks ETF Rank #3 (Hold).
Technology
Tech companies, particularly in the growth segment, are often financed with significant debt, making them sensitive to interest rates. When the interest rates are low, these companies can borrow more cheaply to finance their growth. This can support increased profitability and higher stock prices. As such, Technology Select Sector SPDR Fund XLK seems a prudent choice. It targets the broad technology sector and follows the Technology Select Sector Index. The ETF holds about 69 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 $74.9 billion and an average daily volume of 6 million shares. The fund charges 8 bps in fees per year and has a Zacks ETF Rank #1 (Strong Buy) (read: ETFs Poised to Win in the MSFT vs. NVDA Market Cap Battle).
Homebuilders
Homebuilders tend to benefit from easing inflation. Mortgage rates fall or stabilize in anticipation of rate cuts or pauses, making home loans more affordable. iShares U.S. Home Construction ETF ITB 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 billion, it holds a basket of 47 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).
Real Estate
With shelter inflation rising at its slowest pace since 2021, REITs may see some relief in their margins. Vanguard Real Estate ETF VNQ targets the real estate segment of the broader U.S. market. It follows the MSCI US Investable Market Real Estate 25/50 Index and holds 158 stocks in its basket. VNQ has key holdings in retail REITs, healthcare REITs and telecom tower REITs, with double-digit exposure each.
Vanguard Real Estate ETF is the most popular and liquid ETF, with an AUM of $33.8 billion and an average daily volume of 3 million shares a day. It charges 13 bps in fees per year from investors and has a Zacks ETF Rank #4.
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Vanguard Real Estate ETF (VNQ): ETF Research Reports Technology Select Sector SPDR ETF (XLK): ETF Research Reports iShares U.S. Home Construction ETF (ITB): ETF Research Reports Consumer Discretionary Select Sector SPDR ETF (XLY): ETF Research ReportsThis article originally published on Zacks Investment Research (zacks.com).
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