TLT, Dividend ETFs Rise Ahead of PCE Report

In a shortened trading week, ETF investors are betting early that Friday’s highly anticipated Personal Consumption Expenditures Price Index (PCE) will be uneventful. On Wednesday, several rate-sensitive exchange-traded funds were higher as investors appeared to gain confidence that this month’s PCE data will not be worse than expected. 

The iShares 20+ Year Treasury Bond Index (TLT) was up 1% while traditional dividend ETFs like the Utility Select Sector SPDR Fund (XLU) and the Vanguard Real Estate ETF (VNQ) rose nearly 3%. 

Since the PCE report is the Fed’s preferred inflation gauge, investors tend to weight it more heavily than the Consumer Price Index (CPI).  

The expectation for this week’s core PCE inflation is for a month-over-month increase of 0.3%. While this provides further support for a “higher-for-longer" narrative, a surprise above that consensus could spook markets hopeful that decreasing prices would enable the U.S. central bank to scale back interest rates. Many investors are clinging to the Fed’s reassuring “dot plot” projection for three rate cuts in 2024. 

Market Expecting Fed Rate Cut in June

The CME FedWatch Tool, which uses 30-Day Fed Funds futures pricing data to predict Fed rate policy at coming FOMC meetings, currently forecasts a 90% probability that the Fed will keep its policy unchanged at its next meeting in May and a 93% probability that the key rate will be cut by at least 25 basis points in June. 

Since the Fed needs more than one month of data to show a continuation of a disinflationary trend toward its 2% target, the next three months of data will be watched closely. 

How TLT, Dividend ETFs Can Rise Further in 2024

Although TLT and dividend ETFs have inched higher lately, the bond market proxy is still down more than 4% this year while the largest dividend ETF, the Vanguard Dividend Appreciation ETF (VIG) is up 7%, but still lags the broader market, as measured by the 10% year-to-date gain for the SPDR S&P ETF Trust (SPY). 

For these income-oriented funds to continue rising, investors will need to see that interest rates are headed lower, as prices for bonds move in the opposite direction as rates and dividend ETFs attract investors looking for alternatives to money market accounts with falling yields. 

But if inflation remains sticky, and the Fed’s dot plot projection of three rates cuts in 2024 changes, bond ETFs and dividend ETFs could continue to struggle.