As the U.S. economy regains momentum this year, the potential for a surge in inflation is spooking investors. A combination of interest rate suppression, higher consumer spending and additional fiscal stimulus could result in higher inflation for an extended period.  According to the U.S. Bureau of Labor Statistics, the all-items consumer price index increased 1.7% for the 12-month period ending in February, versus  the 1.4% reported for the 12-month period ending in January.

While  higher inflation could drive up interest rates and favor bonds over stocks, the banking, industrial and energy sectors are  positioned to benefit from an interest rate uptick. That’s because higher interest rates boost banks’ interest income. Also, a surge in demand for oil and other energy sources would drive up their prices because households and manufacturers tend to consume more as economic activity increases. Further, industrial and transportation companies would benefit from higher  sales income.

Hence, we believe investing in the Energy Select Sector SPDR Fund (XLE), the Industrial Select Sector SPDR Fund (XLI), and the SPDR S&P Bank ETF (KBE) could be a good way to protect one’s portfolio from the potential damage higher inflation might cause.

Energy Select Sector SPDR Fund (XLE)

XLE provides exposure to U.S. energy companies, which include some of the largest oil producers in the world, as well as companies in the gas and consumable fuels and energy equipment and services industries. The fund has approximately $24.23 billion in assets under management (AUM). XLE’s major holdings include Exxon Mobil Corporation (XOM), Chevron Corporation (CVX) and ConocoPhillips (COP).

XLE has a 0.12%  expense, which is lower than its category average  0.48%. The ETF has a stable environmental, social and government (ESG) outlook. It has a BBB MSCI Rating, which is based on a score of 5.42 out of 10. XLE has gained 64.5% over the past year and 62.3% over the past six months. The ETF pays $2.13 in dividends annually and its four-year average dividend yield is 5.2%.

XLE closed yesterday’s trading session at $51.45 and has advanced 18.6% over the last month. The  ETF has seen net inflows of $1.94 billion during this period.

XLE’s POWR Ratings reflect this promising outlook. The ETF has an overall A rating, which equates to Strong Buy in our proprietary rating system. XLE has an A grade for Trade and Buy & Hold, and a B for Peer Grade. Of the 40 ETFs in the B-rated Energy Equities ETF group, XLE is ranked #1.

Industrial Select Sector SPDR Fund (XLI)

XLI offers investors  broad exposure to the U.S. industrial firms, which include transportation firms, commercial and professional services providers, and manufacturers of capital goods. The ETF is appealing primarily because of its impressive liquidity and because  it closely tracks a market-cap-weighted index of industrial-sector stocks drawn from the S&P 500. It has approximately $19.19 billion in AUM . XLI’s major holdings include Honeywell International Inc. (HON), Union Pacific Corporation (UNP) and Boeing Company (BA).

The ETF has an MSCI ESG Rating of A, based on a score of 6.44 out of 10. XLI has a 0.12% expense ratio, which is lower than the category average of 0.42%. The ETF has gained 55% over the past year and 24% over the past six months. It pays $1.37 in dividends annually and its four-year average dividend yield is 1.9%.

XLI is currently trading at $96.19, which is just 1.5% lower than its 52-week high of $97.61. The fund has witnessed a net inflow of $1.81 billion over the past month and is up 8.1% during the same period.

It is no surprise that XLI has an overall A rating, which translates to Strong Buy in our POWR Ratings system. It has an A for Trade Grade and Buy & Hold Grade, and a B for Peer Grade. It is currently ranked #1 of 32 ETFs in the B-rated Industrial Equities ETFs group.

SPDR S&P Bank ETF (KBE)

With approximately $3.93 billion in assets under management, KBE offers exposure to U.S. banking institutions, providing access to a narrow sub-sector of the financial sector, which can deliver big performances over a short time span. The ETF closely tracks an equal-weighted index of U.S. banking securities. KBE’s major holdings include Signature Bank (SBNY), SVB Financial Group (SIVB) and Sterling Bancorp (STL).

KBE has an MSCI ESG Fund Rating of BBB, which is based on a score of 5.34 out of 10. The fund has an expense ratio of 0.35%, compared to the category average 0.87%. It has gained 75% over the past year and 75.4% over the past six months. The ETF has distributed $1.02 as dividends annually, which translates to a 1.87% dividend yield. Its four-year average dividend yield is 2.1%.

KBE closed yesterday’s trading session at $53.92 and is trading just 2.5% below its 52-week high of $55.29. The ETF has advanced 15.1% over the last month and has seen net inflows of $56.48 million during this period.

The ETF’s strong fundamentals are reflected in its POWR Ratings. KBE has an overall A rating, which equates to Strong Buy in our POWR Ratings system. It has an A for Trade Grade and Buy & Hold Grade. The fund is currently ranked #4 of 40 ETFs in the Financial Equities ETFs group.

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XLE shares were trading at $51.23 per share on Wednesday morning, down $0.22 (-0.43%). Year-to-date, XLE has gained 35.17%, versus a 5.38% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...

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