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May-26 Outlook

TrendWell Digest: May 2026 ETF Picks

The Federal Reserve held rates steady at 3.5–3.75% for the third consecutive meeting in April, with an unusual 8-4 dissent split highlighting deepening divisions amid stagflationary pressures. The Iran conflict has pushed headline inflation to 3.3% year-over-year in March—driven by a 21% spike in gas prices—while the labor market has stabilized and materials sector volatility has surged. With Powell's tenure as Fed Chair winding down and Kevin Warsh expected to take the helm in June, this month's five ETF picks reflect a market navigating energy-driven inflation, elevated commodity volatility, and a steady labor backdrop. Based on nearly 25 years of historical data (back to October 2000), when all of these predictive drivers have aligned as they do now, this group has delivered an average annualized return of 12%.

SPY — SPDR S&P 500 ETF Trust

SPY tracks the S&P 500 Index, providing broad exposure to large-cap U.S. equities.

  • Materials volatility at peak levels: The 14-month Relative Strength Index (RSI) of XLB (Materials Select Sector) volatility sits at 127% of historical levels—reflecting the commodity turbulence triggered by the Middle East energy shock. When commodity-linked volatility reaches this level, broad equity markets historically stabilize and rally as the volatility mean-reverts. SPY has averaged 16% annualized when XLB RSI was at this level or higher, compared to 6% when it was lower.
  • Healthcare lagging signals risk-on positioning: The six-month change in XLV (Health Care Select Sector) is up only 1%. Defensive healthcare underperformance signals that capital isn't flowing into traditional safety trades—a constructive sign for broad market risk appetite. SPY has returned 10% annualized when XLV six-month gains have been this muted, versus 7% otherwise.

DGT — SPDR Global Dow ETF

DGT tracks the Global Dow Index, offering exposure to 150 leading large-cap companies across developed and emerging markets globally.

  • Materials volatility at peak levels: The 14-month RSI of XLB volatility at 127% reflects elevated turbulence in commodity-driven sectors—a dynamic with global implications given the Iran war and oil price spike. When this volatility has been this extended, DGT has historically benefited from mean-reversion across globally-linked materials and industrials names. DGT has averaged 14% annualized when XLB RSI was at this level or higher, compared to 1% otherwise.
  • Consumer staples gains contained: The six-month change in XLP (Consumer Staples) is up 10%. This is moderate defensive performance—not aggressive flight-to-safety, but enough to indicate balanced risk positioning. When XLP six-month gains have been at this level or lower, DGT has returned 6% annualized versus -2% when staples were rallying harder.

XLE — Energy Select Sector SPDR Fund

XLE tracks the S&P Energy Select Sector Index, including major oil and gas producers, refiners, and energy equipment companies.

  • Fed funds rate steady: The prior month's change in the effective federal funds rate (DFF) is flat at 0%, reflecting April's third consecutive Fed hold. Stable rates support energy demand expectations and reduce uncertainty for capital-intensive energy projects. When DFF has shown this level of stability or weaker, XLE has averaged 16% annualized; when rates were rising, just 4%.
  • Materials sector volume surging: The twelve-month change in XLB (Materials Select Sector) trading volume—measured on a 30-day average—is up 33%. Elevated commodity-sector trading volume signals heightened investor engagement with cyclical and resource-driven names, often spilling over into energy. When XLB volume has been this elevated, XLE has returned 14% annualized versus 7% when volume was lower.

IJJ — iShares S&P Mid-Cap 400 Value ETF

IJJ tracks mid-cap U.S. value stocks, blending the size premium of mid-caps with value-factor exposure.

  • Stable unemployment trends: The three-month change in the unemployment rate (LNU01300000) is flat at 0%. With unemployment hovering around 4.3% and showing little movement, the labor market provides a steady foundation for cyclical mid-cap value names tied to consumer spending and business investment. When unemployment has held steady, IJJ has averaged 26% annualized versus 2% when rising.
  • Materials volatility at peak levels: The 14-month RSI of XLB volatility at 127% suggests commodity-sector turbulence is at extended levels and due to subside. Mid-cap value companies—often with industrial and materials exposure—benefit when this volatility normalizes. IJJ has returned 20% annualized when XLB RSI was at this level or higher, compared to 7% when lower.
  • Energy gains running hot but contained: The twelve-month price change in XLE is up 46%—a substantial rally driven by the Iran conflict and oil supply concerns. Historically, when XLE twelve-month gains have been at this level or lower (covering most of the dataset), IJJ has averaged 12% annualized; when energy rallied even more aggressively, IJJ averaged -9%. The current reading sits right at the threshold, signaling that further energy escalation would shift the picture.

XLP — Consumer Staples Select Sector SPDR Fund

XLP tracks consumer staples companies—producers of household goods, food, beverages, and personal products.

  • Recent XLP weakness sets up rebound: The three-month change in XLP itself is up only 1%. Muted near-term performance in staples often precedes mean-reversion rebounds, particularly in environments where inflation is pressuring consumer spending and defensive positioning gains appeal. When XLP three-month gains have been this subdued, the ETF has averaged 11% annualized versus 1% when it was already rallying.
  • Materials volatility at peak levels: The 14-month RSI of XLB volatility at 127% signals broad commodity turbulence that often drives investors toward defensive sectors like staples. As capital seeks shelter from materials volatility, dividend-paying consumer staples typically benefit. XLP has returned 9% annualized when XLB RSI was at this level or higher, compared to 4% when lower.
  • Small-cap value volume contraction contained: The month-over-month change in IJS (iShares S&P Small-Cap 600 Value) trading volume—on a 30-day average—is down 18%. Declining small-cap volume signals capital rotation away from risk-on segments, which historically benefits defensive staples. When IJS volume contraction has held at this level or milder, XLP has averaged 8% annualized versus 0% when small-cap volume collapsed further.

Conclusion

The convergence of elevated materials volatility, stable interest rates, a steady labor market, and energy-driven inflation creates a nuanced backdrop for May's ETF picks. With the Fed in extended pause mode and the Iran conflict reshaping energy markets, broad market exposure through SPY and DGT, targeted energy plays via XLE, mid-cap value through IJJ, and defensive staples in XLP offer diverse positioning across the current macro themes. The data points to a favorable setup for these five ETFs as commodity volatility normalizes and the labor market holds firm—and we hope your portfolio continues to TrendWell.

This article is for informational purposes only and does not constitute financial advice.

Sources:

  • Federal Reserve FOMC Statement, April 29, 2026 (federalreserve.gov)
  • CNBC, "Fed interest rate decision April 2026," April 29, 2026 (cnbc.com)
  • Indeed Hiring Lab, "April 2026 FOMC Reaction: Uncertainty From All Directions," April 29, 2026 (hiringlab.org)
  • Fox Business, "Fed holds rates steady as Powell's chairmanship winds down," April 29, 2026 (foxbusiness.com)