Voya Financial (VOYA) Q3 Earnings and Revenues Top Estimates

Red-hot inflation reading has been hitting headlines across the developed markets for more than a year. Though price levels started cooling this year, the figure is still stubborn. The annual inflation rate in the United States slowed to 6% in February of 2023, the lowest since September of 2021, in line with market forecasts, and compared to 6.4% in January. 

Though the Fed hiked rates by only 25 bps this week to 4.75%-5.00% and softened its hawkish tone, the U.S. Central bank chief clearly stated that inflation is still “elevated.” The Fed also indicated that “some additional policy firming may be appropriate.”

But then, the U.S. banking crisis has led the Fed to opt for a less-hawkish move in the coming days. The forward outlook, based on a median survey of FOMC members, expects only one more 25 bps hike throughout the rest of 2023, 75 bps in decreases by the end of 2024 and 125 bps in drops by 2025 end (read: Is it Time for Growth ETFs as Fed Softens Hawkish Tone?).

Against this backdrop, investors may expect a spike in inflation in the near term. We suggest a few sector ETFs that can be worth investing at the time of rising inflation. Below we highlight those.

Sector ETFs in Focus

Energy – Energy Select Sector SPDR ETF (XLE)

The energy sector, which includes oil and gas companies, has historically offered upbeat performance in a rising inflationary environment. Such firms beat inflation 74% of the time and delivered an annual real return of 12.9% per year on average, per a research report of Hartford Funds.

The revenues of energy stocks are tied to energy prices, a key component of inflation indices. This time also, rise in oil prices boosted inflation globally. And energy ETFs emerged outperformers. XLE is up 5.3% past year despite a decline a 10.4% decline in the year-to-date frame (due to global growth concerns).

Real Estate –Vanguard Real Estate ETF VNQ

Per a research report of Hartford Funds, equity REITs outperformed inflation 66% of the time and posted an average real return of 4.6%. Equity REITs own real-estate assets and may provide a limited inflation hedge via the pass-through of price increases in rental contracts and property prices.

Notably, shelter makes up 32.77% of U.S. consumer price index, of which 7.8% is rent and 23.68% is private housing, per data from MacroMicro. The price index for shelter was the largest contributor to the monthly all items increase in February, making up over 70% of the increase. Shelter costs rose 8% in February. Rising home prices also boosted the demand for real estate.

Materials – Materials Select Sector SPDR ETF (XLB)

The Materials sector is riding higher on higher demand for materials and will likely continue its trend as the economy gains steam. The sector has been underinvested for long. The valuation of the sector is still cheaper even after beating the S&P 500 in the past year. Supply chain woes and the resultant high inflation will keep the prices of materials higher.

Basically, these companies tend to own physical assets and sell commodity-based products. Since the value of their assets and the prices of their products increase with inflation, their stock prices become beneficiaries of inflation.

Consumer Staples – Consumer Staples Select Sector SPDR ETF (XLP)

This sector is also believed to perform better in a rising inflationary environment. The sector has historically delivered positive performance in such a situation. Staples companies tend to pass their rising input costs to customers. And since the sector is non-cyclical in nature, the demand for its products remain steady in any economic condition.    

Notably, the food index in the United States increased 0.4% in February, and the food at home index rose 0.3% sequentially. Five of the six major grocery store food group indexes gained over the month. This shows that high food prices are driving U.S. inflation. Still XLP is down only 1.5% past month (against a decline of 1.6% in the S&P 500) and off only 0.4% past year (against a fall of 11.4% in the S&P 500).

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Energy Select Sector SPDR ETF (XLE): ETF Research Reports

Vanguard Real Estate ETF (VNQ): ETF Research Reports

Consumer Staples Select Sector SPDR ETF (XLP): ETF Research Reports

Materials Select Sector SPDR ETF (XLB): ETF Research Reports

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Zacks Investment Research

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