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ETFs to Surge on Hotter-Than-Expected Inflation

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Inflation in the United States turned hotter and roared to a level not seen in more than four decades, compelling the Fed to act more aggressively to rapid price increases throughout the economy. The consumer price index (CPI) climbed 9.1% year over year in June to a fresh 40-year high, up from a 8.6% jump in May.

Investors could make some profits by investing in ETFs benefiting from 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 Defiance Hotel, Airline, and Cruise ETF (CRUZ - Free Report) — could be compelling choices for investors amid growing inflation.

Behind the Inflation Numbers

Most of the increase in consumer prices were driven by gasoline, which spiked 11.2% from the previous month and nearly 60% from a year-ago level. Rising shelter and food prices were also major contributors. The war in Ukraine has pushed global energy and food prices higher. Gasoline hit a record of more than $5 per gallon last month though prices eased recently (read: Ride Higher With Gasoline ETF as Price at Pump Surges to $5).

The so-called core inflation, which strips out volatile components such as food and energy prices, rose 0.7% from the prior month and 5.9% from the year-ago level.

Prices of the other categories also skyrocketed. Airfare rose about 34% year over year, while eggs saw an increase of nearly 33%. Grocery prices jumped 12.2% — the steepest such climb since 1979. Rents rose 5.8% — the highest since 1986 and new car prices increased 11.4% from the year-ago month.

The data raised bets that the central bank could increase rates by a historic 100 bps this month to battle the 40-year high inflation. Fed policymakers have already signaled a second 75 bps hike in interest rates later this month amid persistent inflation. According to the latest data by CME Group, traders are pricing in a nearly 80% probability of a full percentage-point rise at the coming meeting.

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 110,000, suggesting that investors have to pay extra beyond the annual fee of 0.90% per year. The fund has managed assets of $129.3 million.

As traders need to roll from one futures 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 (read: Best & Worst Performing ETFs of 1H22).

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

Invesco Dynamic Food & Beverage ETF offers exposure to 32 stocks 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.

With AUM of $286.5 million, Invesco Dynamic Food & Beverage ETF charges 63 bps in annual fees from investors and sees a moderate average daily volume of 146,000 shares. PBJ has a Zacks ETF Rank #3 (Hold) 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 49 securities. Within the transportation sector, air freight and logistics, and railroads take the top two spots with at least 31% share each, while trucking (20.2%) and airlines (15.3%) round off the next two.

iShares U.S. Transportation ETF has $825.9 million in AUM and has a good trading volume of 274,000 shares a day. It charges 41 bps in fees per year and has a Zacks ETF Rank #2 (Buy) with a High risk outlook (read: Tap Q2 Earnings Growth With Sector ETFs).

Defiance Hotel, Airline, and Cruise ETF (CRUZ - Free Report)

Defiance Hotel, Airline, and Cruise ETF tracks the BlueStar Global Hotels, Airlines, and Cruises Index, which measures the performance of globally listed companies primarily engaged in the travel and tourism industries. Holding 56 stocks in its basket, American firms make up 72.3% of the portfolio, while Britain, Japan and Ireland round off the next three with single-digit exposure each.

Defiance Hotel, Airline, and Cruise ETF, launched in June 2021, has gathered around $36 million in its asset base and charges 45 bps in annual fees. Volume is lower as it exchanges around 67,000 shares a day on average. CRUZ has a Zacks ETF Rank #3.u