The annual inflation rate in the United States accelerated for a second straight month to 3.7% in August from 3.2% in July, above market forecasts of 3.6%. Oil prices have been on the rise in the previous two months, which has been held responsible for the high price inflation. Core inflation rate however, which excludes food and energy, slowed for the fifth month to 4.3%, in line with market expectations.
In August 2023, energy cost fell 3.6% year over year, much less than a 12.5% drop in July, with prices declining at a smaller pace for fuel oil (-14.8% vs -26.5%) and gasoline (-3.3% vs -19.9%). Also, cost of transportation services (10.3% vs 9%) increased more.
On the other hand, inflation slowed for electricity prices (2.1% vs 3%), food (4.3% vs 4.9%), shelter (7.3% vs 7.7%), new vehicles (2.9% vs 3.5%) and apparel (3.1% vs 3.2%). Also, faster decreases were seen in cost for utility gas service (-16.5% vs -13.7%), medical services (-2.1% vs -1.5%) and used cars and trucks (-6.6% vs -5.6%).
Against this backdrop, we suggest a few sector ETFs that can be worth investing at the time of higher inflation. Below we highlight those.
Sector ETFs in Focus
Energy – iShares U.S. Oil Equipment & Services ETF (IEZ)
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 increased inflation globally. Oil is currently hovering around a 10-month high amid record demand and tightening supply. And energy ETFs should emerge outperformers. IEZ is up 4.8% past month.
Transportation – SPDR S&P Transportation ETF (XTN)
The transportation index jumped 2% sequentially in August after an uptick of 0.3% in July. The index gained 10.3% year over year.. SPDR S&P Transportation ETF (XTN) has a Zacks Rank #2. Trucking takes about 40% of the fund, followed by Airlines and Air Freight & Logistics.
Real Estate – Hoya Capital Housing ETF (HOMZ)
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. Shelter costs rose 7.3% in August. The fund HOMZ has lost 3.7% in the past month.
Restaurants – AdvisorShares Restaurant ETF (EATZ)
The index for food away from home rose 6.5% year over year and 0.3% sequentially. The index for limited service meals rose 0.3% sequentially, and the index for full service meals increased 0.2%.
The AdvisorShares Restaurant 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.
Medical Care Commodities — iShares U.S. Medical Devices ETF IHI
The index recorded a sequential gain of 0.6% in inflation. Inflation gained 4.5% year over year. The Zacks Rank #2 ETF iShares U.S. Medical Devices ETF (IHI), hence, draws attention. Health Care Equipment (80.80%) takes the top spot in the fund, followed by Life Sciences Tools & Services (18.81%).
iShares U.S. Oil Equipment & Services ETF (IEZ): ETF Research Reports
SPDR S&P Transportation ETF (XTN): ETF Research Reports
iShares U.S. Medical Devices ETF (IHI): ETF Research Reports
Hoya Capital Housing ETF (HOMZ): ETF Research Reports
AdvisorShares Restaurant ETF (EATZ): ETF Research Reports
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