Inflation has been on an uphill ride this year thanks to the low-base effects from 2020. Also, because economic recovery has picked up on widespread vaccination and fiscal stimulus, business restrictions have been relaxed and demand has jumped.
The annual inflation rate in the United States rose to a 13-year high of 5.4% in September of 2021 from 5.3% in August and above market expectations of 5.3%. Faster price increases were recorded for cost of shelter (3.2% vs 2.8% in August); food (4.6% vs 3.7%, the highest since December of 2011), namely food at home (4.5% vs 3%); new vehicles (8.7% vs 7.6%); and energy (24.8% vs 25%),
per trading economics.
Against this backdrop, we suggest a few sector ETFs that can be worth investing at the time of rising inflation. Below we highlight those.
Sectors to Gain Energy
Energy sector tends to perform well in an inflationary environment. The revenues of energy stocks are dependent on energy prices, a key factor of inflation indices. Such firms surpassed inflation
71% of the time within a time span of 1973-2020 and delivered an annual real return of 9.0% per year on average.
The operating backdrop of the sector too is bullish. Oil price has been on a tear with Brent hitting the highest level since October 2018 while WTI jumped to $80 per barrel — the highest since 2014. The rally has been driven by supply disruptions and storage drawdowns as well as growing demand with the easing of pandemic restrictions.
VanEck Vectors Unconventional Oil & Gas ETF could be good play out here. Information Technology
“The best businesses during inflation are the businesses that you buy once and then you don’t have to keep making capital investments subsequently,” Buffett said,
as quoted on CNBC. Information Technology business normally does not require recurrent capital investments, which makes it an inflation-friendly investment. CNBC’s Jim Cramer said that big tech stocks are lucrative bets amid rising inflation and chances of higher interest rates.
Cramer explained that big-tech names like Google-parent Alphabet (GOOGL) and Microsoft’s (MSFT) business model are not that responsive to changes in inflation, including the rise in prices for raw materials, chemicals and commodities like gas, plastics, packaging and so on.
Technology Select Sector SPDR ETF ( XLK Quick Quote XLK - Free Report) and Global X Social Media ETF (SOCL) look to be great bets here.
Having said this, we would lie to note that one may witness occasional selloffs in the high-growth tech space in a rising rate environment. It is better to hold tech stocks with a medium-to-long-term view.
Warren Buffett also suggests owning real estate during times of inflation because the purchase is a “one-time outlay” for the investor, does not incur recurring costs and involves resale value. In a rising-inflation environment, real estate stocks act as good bets. Both, resale value of the property and rental income, rise with price inflation.
Plus, an uptick in home prices is a boon for renters. Along with some analysts, we too believe that fast-rising home prices are likely to keep prospective homebuyers away from the ownership and direct them toward the rental market. Equity REITs
outperformed inflation 67% of the time and offered an average real return of 4.7%.
Some of the decent real estate ETF plays right now are
Real Estate Select Sector SPDR ETF ( XLRE Quick Quote XLRE - Free Report) (yields 3.13% annually), U.S. Diversified Real Estate ETF (PPTY) (yields 4.90% annually) and VanEck Vectors Mortgage REIT Income ETF (MORT) (yields 7.29% annually). Consumer Staples
These companies normally pass on cost increases to consumers to maintain profit margin. With consumer staples being a non-cyclical sector, the sheer necessities of staples can’t even deter consumers from buying those goods. Hence, the sector should hold up well in an inflationary environment. Consumer Staples
outperformed inflation about 55% of the time during 1973-2020 with an average real return of about 2.3%. Consumer Staples Select Sector SPDR ETF ( XLP Quick Quote XLP - Free Report) could thus be in investors’ cards.