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Core Inflation at 29-Year High: 6 ETF Areas to Benefit

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Talks of rising U.S. inflation have been all over the markets in recent weeks. the annual inflation rate has accelerated to a higher-than-expected 5.0% in May.Excluding volatile food and energy prices, the "core" consumer price index (CPI) rose 3.8% year over year, without seasonal adjustment. It marked the largest one-year increase since the period ending June 1992.

Inflation warmed up in spring. The annual inflation rate in the United States jumped to 4.2% in April 2021 from 2.6% in March and way higher than the market forecast of 3.6%. It marked the highest reading since September 2008, due to an uptick in demand amid economic reopening, a spike in commodity prices and supply constraints.

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 also fueled inflation. Analysts pointed out some historical evidences of higher inflation in the aftermath of the fiscal and monetary stimulus.

Deutsche Bank strategists led by Parag Thatte recently published a note that showed investors betted big on both equity and fixed income products that are supposed to be winners in an inflationary environment: TIPS, energy, materials and financials. Based on an article published on yahoo finance, below we highlight a few ETF investing areas that could be winners in an inflationary environment.

ETF Areas in Focus


U.S. Treasury Inflation-Protected Securities (TIPS) offers exposure to U.S. 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 (read: Inflation Zooms to 13-Year High: 5 Solid TIPS ETF Picks).

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. iShares TIPS Bond ETF (TIP - Free Report) is one of the biggest TIPS ETF.


This area could gain ahead. The coronavirus blues of the energy sector look to be slowly passing away. The coronavirus-led global slowdown has weighed on oil demand since last year following lockdowns but growing vaccination and falling cases in the United States boosted the oil price.InfraCap MLP ETF (AMZA - Free Report) could be an area to play (read: MLP ETFs At One-Year High: Can the Rally Sustain?).


The financial sector is increasingly gaining investor attention as the prospects for the space look bright amid a rebounding U.S. economy. Yield curve steepened materially on rising inflation and rates.

The biggest winner of the steepening yield curve is the banking sector. Bargain hunting also added some gains. As banks seek to borrow money at short-term rates and lend at long-term rates, a steepening yield curve will earn more on lending and pay less on deposits, thereby leading to a wider spread. This will expand net margins and increase banks’ profits. SPDR S&P Bank ETF (KBE - Free Report) is a good pick out here (read: 5 ETFs to Play Rising Yields).


Commodities are on an unstoppable rally this year thanks to recovering global economic growth from the pandemic lows, reopening economies, reflation trade and massive stimulus flows. JPMorgan expects a continued rally in commodities as reflation and reopening trade will continue. Invesco DB Commodity Index Tracking ETF (DBC - Free Report) could be tapped in such a scenario  (read: Commodity Prices on an Unstoppable Rally: ETFs to Benefit).

Real Estate

With higher demand and an uptrend in inflation, home prices have been uphill. Thanks to rising home prices, affordability is falling. Demand for renting has been increasing, which in turn is giving a push to shelter costs. This means exposure to real estate could be inflation-beating. iShares U.S. Home Construction ETF (ITB - Free Report) and Real Estate Select Sector SPDR ETF (XLRE - Free Report) are two ETF plays out here.


The inflationary backdrop in the United States is favorable for gold as the metal is historically viewed as a hedge against inflation. Rising inflation often lowers the value of the concerned currency, meaning a subdued greenback. If the greenback remains subdued, gold will gain some glitter back. SPDR Gold Shares (GLD - Free Report) (read: 3 Reasons Why Gold ETFs Could Gain Higher).

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