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Inflation Is Picking Up: 5 ETFs to Make the Most of It
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Inflation has been picking up across the globe with prices rising for almost everything from raw materials to food prices to shipping costs. Though the Fed has signaled any rise in inflation as temporary, investors are getting jittery that price pressures will force the central bank to tighten the policies earlier than expected.
The five-year breakeven inflation rate — which measures expectations of inflation five years out — reached its highest since April 2011 on May 10 while the 10-year breakeven inflation rate — a measure of expectations of inflation in 10 years time — rose to its highest since March 2013. According to a survey conducted by the Federal Reserve Bank of New York, median U.S. inflation expectations for the next 12 months rose to 3.4% from 3.2% last month. This represents the highest level since September 2013. Expectations for inflation over the next three years held at 3.1%, the highest since July 2014.
As the economy is recovering from the pandemic lows with a wider reach of vaccinations among Americans and reopening economies, demand is surging and supply is limited, leading to a spike in inflation. There have been shortages on the supply side of the U.S. economy given lack of commodities, labor shortages and other inputs to produce the totality of all the goods and services demanded by other businesses and American consumers. Additionally, huge infrastructure and stimulus packages in the United States have also been viewed as a key contributing factor to the inflation.
As a result, groceries like fruits, vegetables, meats, poultry, fish, and eggs are getting more expensive while gas prices are also rising. The soybean futures contract topped $16 per bushel for the first time since September 2012 while corn and wheat are also on the surge. U.S. home prices surged the most on the record and copper prices are trading at record levels (read: Why Agricultural Commodity ETFs Are Soaring This Year).
Many economists expect the economy to fully recover from the recession in late 2023. They forecast U.S. growth to top 7% this year, which would be the fastest since 1984, following the worst performance in 74 years when the economy contracted 3.5% in 2020. Per the IMF projection, the United States is expected to become the engine of the global economy this year with the strongest growth of 6.4% in decades. The red-hot economy will continue to push inflation higher.
How to Tap?
Though the global stock market has been under pressure due to inflation anxiety, investors could still make some profits by investing in ETFs that are benefiting from the scenario. Below, we highlight five funds from different corners of the space that could be compelling choices for investors amid the growing inflation:
Invesco DWA Basic Materials Momentum ETF (PYZ - Free Report)
As prices for various types of materials have been on rise, the material sector is poised for solid growth. This ETF tracks the Dorsey Wright Basic Materials Technical Leaders Index, giving investors exposure to 31 stocks that are showing relative strength (momentum). Metals & mining dominates the fund’s returns at 43% while chemicals accounts for 41.6% of the portfolio. The fund has amassed $140.8 million in its asset base while charges 60 bps in fees and expenses. Volume is paltry as it exchanges nearly 25,000 shares in hand a day. The fund has a Zacks ETF Rank #2 (Buy) with a High risk outlook (read: 5 Top-Ranked ETFs to Ride on a Booming Economy).
The housing market has been the hot segment buoyed by lower mortgage rates, skyrocketing demand and limited supplies. The thirst for home buying is rising even in the face of increasing housing prices, thus providing huge profits to homebuilders. ITB provides exposure to U.S. companies that manufacture residential homes by tracking the Dow Jones U.S. Select Home Construction Index. With AUM of $3.1 billion, it holds a basket of 46 stocks with a heavy concentration on the top two firms. The product charges 42 bps in annual fees and trades in a heavy volume of around 2.5 million shares a day on average. It has a Zacks ETF Rank #3 (Hold) with a High risk outlook (read: Housing ETFs to Shine Bright as New Home Sales Rise in March).
SPDR S&P North American Natural Resources ETF (NANR - Free Report)
This ETF provides exposure to U.S. and Canadian publicly traded large and mid-cap companies within the sub???industries of the energy, metals & mining or agriculture categories with 45%, 35% and 20% share, respectively. It follows the S&P BMI North American Natural Resources Index, holding 29 stocks in its basket. The fund has amassed $689.5 million and charges 35 bps in annual fees. It trades in a moderate volume of 122,000 shares a day on average.
The financial sector is one of the biggest beneficiaries of rising inflation and potentially rising interest rates. This is because rising rates mean high yields on loan and fixed income portfolios, which increase revenue margins for the financial institutions with those portfolios. While there are many options available in the sector, KRE, which targets the banking corner, appears as a more exciting pick. The product follows the S&P Regional Banks Select Industry Index, charging investors 35 basis points a year in fees. It is one of the largest and most-popular ETFs in the banking space with AUM of $5.6 billion and an average daily volume of 8.1 million shares. Holding 132 securities in its basket, the fund carries a Zacks ETF Rank #2 with a High risk outlook (read: 5 Banking ETFs That Have Gained More Than 30% YTD).
WisdomTree Enhanced Commodity Strategy Fund (GCC - Free Report)
This ETF is used to satisfy demand for inflation hedging instruments. It is an actively managed ETF providing broad-based exposure to the four commodity sectors: energy, agriculture, industrial metals, and precious metals primarily through investments in futures contracts. It has AUM of $174.4 million and charges 55 bps in annual fees. The fund trades in an average daily volume of 87,000 shares.
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Inflation Is Picking Up: 5 ETFs to Make the Most of It
Inflation has been picking up across the globe with prices rising for almost everything from raw materials to food prices to shipping costs. Though the Fed has signaled any rise in inflation as temporary, investors are getting jittery that price pressures will force the central bank to tighten the policies earlier than expected.
The five-year breakeven inflation rate — which measures expectations of inflation five years out — reached its highest since April 2011 on May 10 while the 10-year breakeven inflation rate — a measure of expectations of inflation in 10 years time — rose to its highest since March 2013. According to a survey conducted by the Federal Reserve Bank of New York, median U.S. inflation expectations for the next 12 months rose to 3.4% from 3.2% last month. This represents the highest level since September 2013. Expectations for inflation over the next three years held at 3.1%, the highest since July 2014.
As the economy is recovering from the pandemic lows with a wider reach of vaccinations among Americans and reopening economies, demand is surging and supply is limited, leading to a spike in inflation. There have been shortages on the supply side of the U.S. economy given lack of commodities, labor shortages and other inputs to produce the totality of all the goods and services demanded by other businesses and American consumers. Additionally, huge infrastructure and stimulus packages in the United States have also been viewed as a key contributing factor to the inflation.
As a result, groceries like fruits, vegetables, meats, poultry, fish, and eggs are getting more expensive while gas prices are also rising. The soybean futures contract topped $16 per bushel for the first time since September 2012 while corn and wheat are also on the surge. U.S. home prices surged the most on the record and copper prices are trading at record levels (read: Why Agricultural Commodity ETFs Are Soaring This Year).
Many economists expect the economy to fully recover from the recession in late 2023. They forecast U.S. growth to top 7% this year, which would be the fastest since 1984, following the worst performance in 74 years when the economy contracted 3.5% in 2020. Per the IMF projection, the United States is expected to become the engine of the global economy this year with the strongest growth of 6.4% in decades. The red-hot economy will continue to push inflation higher.
How to Tap?
Though the global stock market has been under pressure due to inflation anxiety, investors could still make some profits by investing in ETFs that are benefiting from the scenario. Below, we highlight five funds from different corners of the space that could be compelling choices for investors amid the growing inflation:
Invesco DWA Basic Materials Momentum ETF (PYZ - Free Report)
As prices for various types of materials have been on rise, the material sector is poised for solid growth. This ETF tracks the Dorsey Wright Basic Materials Technical Leaders Index, giving investors exposure to 31 stocks that are showing relative strength (momentum). Metals & mining dominates the fund’s returns at 43% while chemicals accounts for 41.6% of the portfolio. The fund has amassed $140.8 million in its asset base while charges 60 bps in fees and expenses. Volume is paltry as it exchanges nearly 25,000 shares in hand a day. The fund has a Zacks ETF Rank #2 (Buy) with a High risk outlook (read: 5 Top-Ranked ETFs to Ride on a Booming Economy).
iShares U.S. Home Construction ETF (ITB - Free Report)
The housing market has been the hot segment buoyed by lower mortgage rates, skyrocketing demand and limited supplies. The thirst for home buying is rising even in the face of increasing housing prices, thus providing huge profits to homebuilders. ITB provides exposure to U.S. companies that manufacture residential homes by tracking the Dow Jones U.S. Select Home Construction Index. With AUM of $3.1 billion, it holds a basket of 46 stocks with a heavy concentration on the top two firms. The product charges 42 bps in annual fees and trades in a heavy volume of around 2.5 million shares a day on average. It has a Zacks ETF Rank #3 (Hold) with a High risk outlook (read: Housing ETFs to Shine Bright as New Home Sales Rise in March).
SPDR S&P North American Natural Resources ETF (NANR - Free Report)
This ETF provides exposure to U.S. and Canadian publicly traded large and mid-cap companies within the sub???industries of the energy, metals & mining or agriculture categories with 45%, 35% and 20% share, respectively. It follows the S&P BMI North American Natural Resources Index, holding 29 stocks in its basket. The fund has amassed $689.5 million and charges 35 bps in annual fees. It trades in a moderate volume of 122,000 shares a day on average.
SPDR S&P Regional Banking ETF (KRE - Free Report)
The financial sector is one of the biggest beneficiaries of rising inflation and potentially rising interest rates. This is because rising rates mean high yields on loan and fixed income portfolios, which increase revenue margins for the financial institutions with those portfolios. While there are many options available in the sector, KRE, which targets the banking corner, appears as a more exciting pick. The product follows the S&P Regional Banks Select Industry Index, charging investors 35 basis points a year in fees. It is one of the largest and most-popular ETFs in the banking space with AUM of $5.6 billion and an average daily volume of 8.1 million shares. Holding 132 securities in its basket, the fund carries a Zacks ETF Rank #2 with a High risk outlook (read: 5 Banking ETFs That Have Gained More Than 30% YTD).
WisdomTree Enhanced Commodity Strategy Fund (GCC - Free Report)
This ETF is used to satisfy demand for inflation hedging instruments. It is an actively managed ETF providing broad-based exposure to the four commodity sectors: energy, agriculture, industrial metals, and precious metals primarily through investments in futures contracts. It has AUM of $174.4 million and charges 55 bps in annual fees. The fund trades in an average daily volume of 87,000 shares.
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>