With the year rapidly approaching its end, investors may be pleased to hear that inflation looks even closer to cooling. Recent analysis to close out the week indicated that prices actually “fell” in November for the first time since 2020. That may be just one data point, but it certainly bolsters bullish investing. As such, investors may want to look to active ETFs that can outperform when backed by potent tailwinds.
The inflation cooling case offers two potential sources of positivity. First and foremost, of course, a price “drop” signaling even cooler inflation also boosts the changes of rate cuts at the Fed. Rate cuts would be a huge boon for the smaller, high-upside firms that certain active ETFs can identify.
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At the same time, just as how any signal of a rate cut sends market watchers to new heights of excitement, inflation cooling alone should inspire. The personal consumption expenditures price index fell 0.1% in November, up 2.6% on the year. While that excludes food and energy prices, it’s a significant marker as the Fed targets 2% annual inflation using that index.
Active ETFs as Inflation Cools
Active ETFs could be poised to benefit. While a simple, passive index may just rise as much as the overall market does, active managers can go further. By picking out the firms most likely to benefit from the pace and type of cooling that may start the year, they can outperform more staid indexes out of the gate.
So, while rates will likely remain elevated for a while, the recent cooling headlines will still excite markets. Active ETFs can ride their robust 2023 into 2024 to a strong start even absent rate cuts. Cooling alone could give active managers time to prepare by identifying firms positioned for an upswing.
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