PCE Report Preview: TLT, Sector ETFs in Focus

After a turbulent few weeks dominated by trade headlines and shifting Federal Reserve expectations, ETF investors are now turning their attention to Wednesday’s PCE report. Fixed-income investors have found recent relief as the iShares 20+ Year Treasury Bond ETF (TLT) gained 1.6% last week and rose another 0.6% Monday, as Treasury yields retreated on softer U.S. trade policy talks.

But for the relief rally in bonds to continue, investors will look for lower inflation readings in this week’s Personal Consumption Expenditures inflation report, which could give the bond market another boost, strengthening TLT and other fixed-income ETFs like the broader bond market proxy, the iShares Core U.S. Aggregate Bond ETF (AGG).  

Meanwhile, sector exchange-traded funds tied closely to technology and discretionary consumer spending, such as the Technology Select Sector SPDR Fund (XLK) and the Consumer Discretionary Select Sector SPDR Fund (XLY), may also see volatility based on the inflation trends revealed in the report.  

Below, we break down what the PCE is, which sectors may be most affected and why this month's release matters—but next month’s could be even more critical.

What is the PCE Report and Why Does It Matter?

The PCE report is the Federal Reserve’s preferred measure of inflation. It tracks the prices of goods and services purchased by U.S. consumers, adjusting for changes in consumer behavior. Unlike the better-known Consumer Price Index (CPI), PCE gives more weight to sectors like healthcare, where people continue to spend regardless of price changes.

The PCE inflation report is critical because it influences the Fed’s monetary policy, which directly impacts interest rates, bond prices and stock valuations.  

If PCE inflation comes in cooler than expected, it could reinforce the recent pullback in Treasury yields, lifting bond ETFs like TLT and AGG even further. Conversely, hotter inflation would likely push yields higher and weigh on both bonds and equity markets.  

Markets will also watch the core PCE reading, which strips out food and energy and is viewed as a more stable indicator of long-term inflation trends.

Sector ETFs That Could React to the PCE Report

Inflation readings can influence sector performance dramatically. For example, XLY (the consumer discretionary sector) is sensitive to consumer purchasing power. If inflation rises too quickly, discretionary spending can decline, hurting XLY holdings like Amazon.com Inc. (AMZN) and Home Depot Inc. (HD).

In contrast, the Consumer Staples Select Sector SPDR Fund (XLP)—which includes defensive names like Procter & Gamble Co. (PG) and Coca-Cola Co. (KO)—tends to hold up better during inflationary periods because consumers must still buy essentials.  

Another sector ETF to watch is the Vanguard Real Estate ETF (VNQ), since real estate is highly sensitive to interest rates; lower inflation could ease fears of rising borrowing costs and support VNQ.

Finally, tech sector names within XLK, such as Apple Inc. (AAPL) and Nvidia Corp. (NVDA), can also be vulnerable, as high-growth sectors often suffer when inflation pressures push up interest rates and discount the future earnings of tech companies.

Why Next Month’s PCE Report May Matter More

While Wednesday’s PCE report will be critical for short-term trading, investors should remember it covers data from March, a period before the new tariffs that took effect on April 2 began impacting prices meaningfully. As a result, while the upcoming numbers will show the inflationary environment leading into the second quarter, they may not capture the potential cost pressures stemming from tariff escalations.

Next month’s PCE report, which will include April data, is likely to be far more telling about how trade tensions are filtering into the real economy and consumer prices. 

For now, however, Wednesday’s report could determine whether the recent bond rally continues—and whether sector leadership shifts further into defensive territory.