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5 ETF Plays to Make the Most of Red-Hot Inflation

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Prices for almost everything, from raw materials to food prices to shipping costs, soared last year at the fastest pace in nearly four decades. This is especially true as the consumer price index (“CPI”) jumped 7% year over year in 2021, the largest 12-month gain since June 1982. The red-hot inflation has set the stage for the first interest rate hike as soon as in March.

Investors could make some profits by investing in ETFs benefiting from rising inflation. These ETFs — Materials Select Sector SPDR (XLB - Free Report) , iShares U.S. Home Construction ETF (ITB - Free Report) , SPDR S&P Regional Banking ETF (KRE - Free Report) , Vanguard Energy ETF (VDE - Free Report) and Invesco DB Commodity Index Tracking Fund (DBC - Free Report) — from different corners of the space could be compelling choices for investors amid growing inflation.

Behind the Inflation Numbers

The pandemic-related supply shortages and continued strength in consumer demand continued to push the prices higher. The so-called core inflation, which strips out volatile components such as food and energy prices, rose 5.5% year over year last year, marking the biggest growth since February 1991.

Energy costs jumped a whopping 29.3% from the year-ago levels, with gasoline soaring 49.6%. Food prices climbed 6.3% - the biggest rise since October 2008, while used car prices — a major component of the inflation increase — spiked more than 37% over the past year (read: 5 Top-Ranked ETFs to Add to Your Portfolio for 2022).

The trend is likely to continue in the coming months given surging demand and limited supply. 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 been viewed as key contributing factors to inflation.

ETFs in Focus

Materials Select Sector SPDR (XLB - Free Report)

As prices of various materials have been on the rise, the material sector is witnessing solid growth. Materials Select Sector SPDR is the most popular material ETF that follows the Materials Select Sector Index. It manages about $8.5 billion in its asset base and trades in volumes as heavy as around 6 million shares. Materials Select Sector SPDR holds about 28 securities in its basket and charges 12 bps in fees per year from its investors.

In terms of industrial exposure, chemicals dominates the portfolio with a 69.2% share, while metals & mining, and containers & packaging round off the top three positions. The product has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook (read: 5 Top-Ranked ETFs to Add to Your Portfolio for 2022).

iShares U.S. Home Construction ETF (ITB - Free Report)

The housing market has been a 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. iShares U.S. Home Construction ETF provides exposure to U.S. companies that manufacture residential homes by tracking the Dow Jones U.S. Select Home Construction Index.

With AUM of $3billion, iShares U.S. Home Construction ETF holds a basket of 46 stocks with heavy concentration on the top two firms. The product charges 41 bps in annual fees and trades in a heavy volume of around 3 million shares a day on average. iShares U.S. Home Construction ETF has a Zacks ETF Rank #2 (Buy) with a High risk outlook (read: 5 ETF Predictions for 2022).

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, SPDR S&P Regional Banking ETF, which targets the banking corner, appears as a more exciting pick.

SPDR S&P Regional Banking ETF 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 $6 billion and an average daily volume of 9 million shares. Holding 140 securities in its basket, SPDR S&P Regional Banking ETF carries a Zacks ETF Rank #2 with a High risk outlook (read: Count on Bank ETFs as Rates Rise).

Vanguard Energy ETF (VDE - Free Report)

Energy stocks should perform well in high-inflation environments. Vanguard Energy ETF is one of the popular choices in the energy space, having accumulated $6.6 billion in its asset base. It provides exposure to a basket of 104 energy stocks by tracking the MSCI US Investable Market Energy 25/50 Index.

Vanguard Energy ETF sees a good volume of about 1.4 million shares and charges 10 bps in annual fees. VDE has a Zacks ETF Rank #2 with a High risk outlook.

Invesco DB Commodity Index Tracking Fund (DBC - Free Report)

Invesco DB Commodity Index Tracking Fund is used to satisfy the demand for inflation-hedging instruments. It follows the DBIQ Optimum Yield Diversified Commodity Index Excess Return, composed of futures contracts on 14 of the most heavily traded and important physical commodities in the world.

Invesco DB Commodity Index Tracking Fund has AUM of $2.8 billion and charges 87 bps in annual fees. The fund trades in an average daily volume of 3.6 million shares.