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ETFs to Gain As Inflation Remains Second Highest in 4 Decades

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After seven consecutive months of relentless gains, inflation has eased slightly from a 40-year high in April. This is especially true as the consumer price index (“CPI”) jumped 8.3% year over year in April, down from an 8.5% year-over-year increase in March, which was the highest since 1981.

This indicates that consumer prices might have peaked but still marks the second-highest inflation in four decades and an ongoing burden for families, especially lower-income Americans. Investors could make some profits by investing in ETFs benefiting from the higher prices. These ETFs — United States Gasoline ETF (UGA - Free Report) , Invesco Dynamic Food & Beverage ETF (PBJ - Free Report) , iShares U.S. Transportation ETF (IYT - Free Report) and iShares U.S. Home Construction ETF (ITB - Free Report) — with exposure to different sectors could be compelling choices for investors amid growing inflation.

Behind the Inflation Numbers

Supply constraints, robust consumer demand and disruptions to global food and energy markets worsened by Russia's war against Ukraine are driving the consumer prices higher.

On a month-to-month basis, consumer prices rose 0.3% from March to April, marking a still-elevated rate but the smallest increase in eight months. The main culprit behind the surge is gasoline price thanks to the ongoing Russia-Ukraine conflict. Nationally, the price of a gasoline reached a record $4.40 per gallon, according to AAA.

Price for the other categories also skyrocketed. Grocery prices shot up 10.8%, marking the largest year-over-year jump since 1980. Prices for new vehicles rose 1.1% month over month, reflecting the fastest monthly rise since December while airline fares jumped 18.6% (read: Manufacturing Slows Again in April: Sector ETFs at Better Spots).

The so-called core inflation, which strips out volatile components such as food and energy prices, rose 0.6% month over month, twice the 0.3% rise from February to March. Higher prices for airline tickets, hotel rooms, new cars, and apartment rental costs continued to surge.

ETFs in Focus

United States Gasoline ETF (UGA - Free Report)

United States Gasoline ETF is designed to track in percentage terms the movements of gasoline prices. The benchmark futures contract is the futures contract on gasoline as traded on the NYMEX. If the near-month contract is within two weeks of expiration, the benchmark will be the next-month contract to expire. United States Gasoline ETF is illiquid with a daily trading volume of about 97,000, suggesting that investors have to pay extra beyond the annual fee of 0.90% per year. The fund has managed assets of $120.2 million.

As traders need to roll from one future contract to another, the fund is susceptible to roll yield. Notably, roll yield is positive when the futures market is in backwardation and negative when the futures market is in contango. Basically, if the price of the near month contract is higher than the next month futures contract, then it is backwardation and the opposite holds true in contango.

Invesco Dynamic Food & Beverage ETF (PBJ - Free Report)

Invesco Dynamic Food & Beverage ETF offers exposure to 31 stocks that are engaged in the manufacture, sale or distribution of food and beverage products, agricultural products and products related to the development of new food technologies by tracking the Dynamic Food & Beverage Intellidex Index (read: Food ETFs Getting Investors' Love Amid Shortage).

With AUM of $334.2 million, Invesco Dynamic Food & Beverage ETF charges 63 bps in annual fees from investors and sees a light average daily volume of 176,000 shares. PBJ has a Zacks ETF Rank #3 with a Medium risk outlook.

iShares U.S. Transportation ETF (IYT - Free Report)

iShares U.S. Transportation ETF tracks the S&P Transportation Select Industry FMC Capped Index, giving investors exposure to a small basket of 52 securities. Within the transportation sector, railroads, and air freight and logistics take the top two spots with at least 30% share each, while trucking (20.7%) and airlines (16.6%) round off the next two.

iShares U.S. Transportation ETF has $1.1 billion in AUM and has a good trading volume of 324,000 shares a day. It charges 41 bps in fees per year and has a Zacks ETF Rank #2 with a High risk outlook (read: A Look at Transport ETFs Post Q1 Earnings).

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

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 $1.5 billion, iShares U.S. Home Construction ETF holds a basket of 52 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 4.9 million shares a day on average. iShares U.S. Home Construction ETF has a Zacks ETF Rank #2 with a High risk outlook.

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