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Talks of rising inflation in the United States have taken the front and center lately after the passage of the $1.9-trillion stimulus bill that included the $1,400-stimulus check under the Biden administration. Widespread vaccination and a prolonged period of a dovish Fed have also cemented the speculation.
The Institute for Supply Management’s monthly manufacturing survey recorded a 64.7% reading. The last time the ISM manufacturing reading was this high was just before a year when GDP expanded at a 7.2% pace and inflation was at 3.8%, per a CNBC article.
Fed’s indication to maintain rock-bottom rates near zero until 2023 and the reopening of global economies also strengthened the bets over rising inflation. The Fed upgraded its forecast for PCE inflation to 2.4% for 2021 from 1.8% projected in December, to 2.0% for 2022 (from 1.9%) and 2.1% for 2023 (from 2.0%) (read: Fed Bumps Up Economic Growth Forecasts: ETFs to Play).
The Fed also bumped up its 2021 GDP growth forecast from 4.2% in December to 6.5% in March and beefed up the 2022 growth forecast from 3.2% to 3.3%. The Fed projected the longer-run growth measure at 1.8%. Unemployment was guided down to 4.5% from 5.0% for 2021, 3.9% from 4.2% for 2022 and 3.5% from 3.7% for 2023.
Analysts pointed out some historical evidences for higher inflation in the aftermath of fiscal and monetary stimulus. Following Roosevelt’s election as president in 1932, his New Deal policies boosted increased government spending to rescue the economy from the trap of depression. The deflationary trend from 1930 to 1933 was snapped thanks to that stimulus and resulted in more normal inflation rates from 1934 to 1937. A similar trend was seen during the phase of World War II, per a Morningstar article.
The current government stimulus package has already ballooned to more than $5 trillion, and Congress will likely boost that in the coming months. This is happening along with a rock-bottom rateand a QE policy. So, a gradual but steady rise in inflation is expected over the medium term. Hence, investors can track the below-mentioned ETFs to fight inflation.
The underlying FTSE 30-Year TIPS (Treasury Rate-Hedged) Index tracks the performance of long positions in the most recently issued 30-year TIPS and duration-adjusted short positions in U.S. Treasury bonds of, in aggregate, approximate equivalent duration dollars to the TIPS. The fund charges 30 bps in fees (read: Rising Rates in the Cards? ETFs to Play).
The fund entered the market on Jan 12. This is an actively managed ETF that seeks long-term growth of capital in real terms. Since the first quarter of 2021 was all about inflationary expectations on faster-than-expected bets on economic growth, the ETF fetched in sizable assets (read: 6 Successful New ETFs of First-Quarter 2021).
The Quadratic Interest Rate Volatility and Inflation Hedge ETF is actively managed and looks to achieve its investment objective primarily by investing, directly or indirectly, in a mix of U.S. Treasury Inflation-Protected Securities and long options tied to the shape of the U.S. interest rate curve. The fund charges 99 bps in fees.
The fund offers exposure to U.S. TIPS, which are government bonds whose face value rises with inflation. TIPS ETFs offer robust real returns during inflationary periods unlike its unprotected peers in the fixed-income world. These securities pay an interest on an inflated-principal amount (principal rises with inflation) and when the securities mature, investors get either the inflation-adjusted principal or the original principal, whichever is greater. As a result, both principal amount and interest payments will keep on increasing with rising consumer prices.
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4 ETFs to Play Rising Inflationary Pressures
Talks of rising inflation in the United States have taken the front and center lately after the passage of the $1.9-trillion stimulus bill that included the $1,400-stimulus check under the Biden administration. Widespread vaccination and a prolonged period of a dovish Fed have also cemented the speculation.
U.S. manufacturing has expanded at the fastest pace since December 1983. The survey pointed out that inflation pressures are building in the expanding economy. Multiple respondents talked about supply chain issues and pricing pressures.
The Institute for Supply Management’s monthly manufacturing survey recorded a 64.7% reading. The last time the ISM manufacturing reading was this high was just before a year when GDP expanded at a 7.2% pace and inflation was at 3.8%, per a CNBC article.
Fed’s indication to maintain rock-bottom rates near zero until 2023 and the reopening of global economies also strengthened the bets over rising inflation. The Fed upgraded its forecast for PCE inflation to 2.4% for 2021 from 1.8% projected in December, to 2.0% for 2022 (from 1.9%) and 2.1% for 2023 (from 2.0%) (read: Fed Bumps Up Economic Growth Forecasts: ETFs to Play).
The Fed also bumped up its 2021 GDP growth forecast from 4.2% in December to 6.5% in March and beefed up the 2022 growth forecast from 3.2% to 3.3%. The Fed projected the longer-run growth measure at 1.8%. Unemployment was guided down to 4.5% from 5.0% for 2021, 3.9% from 4.2% for 2022 and 3.5% from 3.7% for 2023.
Analysts pointed out some historical evidences for higher inflation in the aftermath of fiscal and monetary stimulus. Following Roosevelt’s election as president in 1932, his New Deal policies boosted increased government spending to rescue the economy from the trap of depression. The deflationary trend from 1930 to 1933 was snapped thanks to that stimulus and resulted in more normal inflation rates from 1934 to 1937. A similar trend was seen during the phase of World War II, per a Morningstar article.
The current government stimulus package has already ballooned to more than $5 trillion, and Congress will likely boost that in the coming months. This is happening along with a rock-bottom rateand a QE policy. So, a gradual but steady rise in inflation is expected over the medium term. Hence, investors can track the below-mentioned ETFs to fight inflation.
ETFs in Focus
ProShares Inflation Expectations ETF (RINF - Free Report)
The underlying FTSE 30-Year TIPS (Treasury Rate-Hedged) Index tracks the performance of long positions in the most recently issued 30-year TIPS and duration-adjusted short positions in U.S. Treasury bonds of, in aggregate, approximate equivalent duration dollars to the TIPS. The fund charges 30 bps in fees (read: Rising Rates in the Cards? ETFs to Play).
Horizon Kinetics Inflation Beneficiaries ETF (INFL - Free Report)
The fund entered the market on Jan 12. This is an actively managed ETF that seeks long-term growth of capital in real terms. Since the first quarter of 2021 was all about inflationary expectations on faster-than-expected bets on economic growth, the ETF fetched in sizable assets (read: 6 Successful New ETFs of First-Quarter 2021).
Quadratic Interest Rate Volatility and Inflation ETF (IVOL - Free Report)
The Quadratic Interest Rate Volatility and Inflation Hedge ETF is actively managed and looks to achieve its investment objective primarily by investing, directly or indirectly, in a mix of U.S. Treasury Inflation-Protected Securities and long options tied to the shape of the U.S. interest rate curve. The fund charges 99 bps in fees.
iShares TIPS Bond ETF (TIP - Free Report)
The fund offers exposure to U.S. TIPS, which are government bonds whose face value rises with inflation. TIPS ETFs offer robust real returns during inflationary periods unlike its unprotected peers in the fixed-income world. These securities pay an interest on an inflated-principal amount (principal rises with inflation) and when the securities mature, investors get either the inflation-adjusted principal or the original principal, whichever is greater. As a result, both principal amount and interest payments will keep on increasing with rising consumer prices.
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Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>