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4 Sector ETFs to Win From About a 40-Year High Inflation

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The CPI jumped at its fastest annual pace in nearly 40 years in November. The datapoints were almost in line with market expectations. Consumer prices soared 6.8% year over year in November, which was more than the 6.2% rise in October and slightly higher than the 6.7% expected. Excluding food and energy, inflation went up to 4.9% in November from 4.6% in October, the highest since June of 1991.

It represented the 9th successive month that inflation stayed above the Fed's 2% target as rising commodities prices, higher demand and supply chain disruptions, and a low base effect from last year continued to raise prices.

The pricing pressure was broad-based, with energy costs marking the largest gain (33.3% versus 30% in October), namely gasoline (58.1% versus 49.6%). Inflation also increased for shelter (3.8% versus 3.5%); food (6.1% versus 5.3%, the highest since October of 2008), namely food at home (6.4% versus 5.4%); new vehicles (11.1% versus 9.8%); used cars and trucks (31.4% versus 26.4%); apparel (5% versus 4.3%); and medical care services (2.1% versus 1.7%), per tradingeconomics.

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

The energy sector tends to perform well in an inflationary environment. 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 moderately bullish. Oil prices staged a rally for the most part of 2021. Just the latest Omicron fear dented the rally on demand worries. With Omicron still not showing any severity in symptoms, we expect the oil rally to resume ahead. SPDR S&P Oil & Gas Exploration & Production ETF (XOP - Free Report) could be good play here.

Consumer Staples

Food-at-home inflation is rising faster than food-away-from home inflation, indicating the hot groceries market. Consumer staples 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.

In fact, online prices for groceries are up 3.9% year over year and up 0.6% month over month. Food products account for about 40.9% of the fund, while beverages (18.8%) and food and staples retailing (15.53%) also get a double-digit weight. Invesco S&P 500 Equal Weight Consumer Staples ETF (RHS - Free Report) is a good pick here.

Real Estate

The ETFs on the U.S. real estate sector has been surging lately on still-low rates. Bets that new COVID-19 variant Omicron may cause milder illness than previously feared eased fears over further lockdowns. Rising home prices also boosted the demand for real estate. Zacks Rank #1 (Strong Buy) Vanguard Real Estate ETF (VNQ - Free Report) should thus win.

Auto

Be it new vehicles or used, price inflation of cars was noticed in November. Vehicle indexes also continued to rise in November. The index for used cars and trucks gained 2.5% sequentially, the same increase as in October. The index for new vehicles rose 1.1% in November after a 1.4% increase in October. First Trust NASDAQ Global Auto Index Fund (CARZ - Free Report) can thus be played on the uptick in car price inflation.