XLK, Technology ETFs Jump on Cooler Inflation

Technology ETFs led the surge of higher prices Wednesday as rate-sensitive exchange-traded funds climbed sharply higher on cooler-than-expected data in May’s CPI report. 

Renewed hopes for a rate cut from the Fed by September helped to lift growth stocks by as much as 2.5%, as measured by the Technology Select Sector SPDR Fund ETF (XLK). 

Rising hopes also lifted the S&P 500, the Nasdaq Composite Index and the Nasdaq-100 to all-time highs, helping to push the SPDR S&P 500 ETF Trust (SPY) and Invesco QQQ Trust (QQQ) to respective price highs. 

The boost in investor sentiment appeared to be primarily driven by the first zero print, or no monthly change in the CPI, in the current cycle.  

This unexpected lull suggests that inflation can move closer to the Fed’s preferred 2% yearly growth rate. 

Later Wednesday, investors received a glimpse into the Fed’s rate policy for 2024, as its “dot plot” projected one rate cut this year, meeting investors’ adjusted expectations. 

Of the central bank’s Federal Open Market Committee members, four plotted no rate cuts this year, seven see one cut, and eight see two cuts. 

Why Lower Rates Are Good for Technology ETFs

Technology ETFs tend to rise in price when investors expect interest rates to fall. The fundamental reason for this is that when interest rates drop, the value of a growth stock's future earnings increases, making them more attractive to investors and potentially leading to faster stock price appreciation. 

Tech companies typically invest heavily in research and development and future growth, rather than paying out dividends to shareholders currently. When interest rates are low or expected to fall from higher levels, investors tend to become interested in the steady returns offered by bonds (which become less attractive) and are more willing to invest in riskier assets like growth stocks, potentially driving their price up. 

It's important to remember that this is a general trend and not a guarantee. There are other factors that can affect the price of technology ETFs, and past performance is not necessarily indicative of future results. 

WWDC, Nvidia Market Cap, XLK Holdings

In addition to friendlier news on the interest rate front, XLK is getting a boost from this week’s Worldwide Developers Conference (WWDC), an information technology event held annually by Apple Inc. Their new AI-driven “Apple Intelligence” has boosted AAPL stock, which is the top holding in XLK with over 20% allocation. 

Also noteworthy for XLK investors, Nvidia’s market cap is set to surpass Apple’s; thus, XLK may be preparing for an allocation weight change in the fund’s holdings. The chipmaker’s weight could jump above 20% from 6% in an XLK rebalance, according to estimates from Bloomberg.