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8 ETFs to Buy to Benefit From Inflation

Inflation is causing issues for some Americans, and that is causing investors to look for exchange-traded funds (ETFs) to buy that will benefit from inflation.
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This article was originally published by Investor Place

Inflation is causing issues for some Americans, and that is causing investors to look for exchange-traded funds (ETFs) to buy that will benefit from inflation.

In October, consumer prices rose 6.2%, their highest increase in more than 30 years. That’s led Shark Tank celebrity Kevin O’Leary to have some blunt things to say about the current economic situation.

“We are seeing real inflation. We’re seeing gasoline prices up remarkably, the price of food and bacon, just the basics that our employees buy — those are up materially,” O’Leary told CNBC on Nov. 23.

O’Leary believes that Biden’s spending bills are only going to make a hot economy that much hotter. Fortunately, as he sees it, the Senate will stop the $1.75-billion Build Back Better Act in its tracks, stopping hyperinflation from taking control.

Nonetheless, for those of you who see inflation sticking around beyond 2021, here are eight ETFs to buy that ought to benefit from inflation.

  • abrdn Bloomberg All Commodity Strategy K-1 Free ETF (NYSEARCA:BCI)
  • SPDR Gold Shares (NYSEARCA:GLD)
  • Schwab US REIT ETF (NYSEARCA:SCHH)
  • Invesco Dynamic Energy Exploration & Production ETF (NYSEARCA:PXE)
  • Vanguard Short Term Inflation-Protected Securities ETF (NASDAQ:VTIP)
  • iShares MSCI Global Agriculture Producers ETF (NYSEARCA:VEGI)
  • Principal Quality ETF (NASDAQ:PSET)
  • VanEck Inflation Allocation ETF (NYSEARCA:RAAX)

Now, let’s dive in and take a closer look at each one.

ETFs to Buy: abrdn Bloomberg All Commodity Strategy K-1 Free ETF (BCI)

Source: Maxx-Studio/ShutterStock.com

Assets Under Management: $852.94 million 

Expense Ratio: 0.25%

The abrdn Bloomberg All Commodity Strategy K-1 Free ETF tracks the performance of the Bloomberg Commodity Index Total Return. The index consists of 23 commodities, including natural gas, gold, crude oil and others. Each commodity is weighted two-thirds by trading volume and one-third by world production.

However, the fund utilizes active management to deliver total returns. This means that it doesn’t have to invest in all of the 23 commodities but does look to follow the index’s rolling schedule for investing in commodities futures.

Energy currently accounts for 39.8% of the portfolio. Agriculture accounts for 27.2%, while precious metals are the third-highest with a 13.6% weighting.  

Natural gas futures account for 14.1% of its assets. Gold futures account for 10.8%, while WTI crude futures have a 9.6% weighting in the third spot. Its top 10 holdings account for 73% of its total assets. 

Since the fund’s inception in March 2017, it’s delivered an annual return of 4.5%, 49 basis points less than the index.

SPDR Gold Shares (GLD)

A photo of a gold nugget on a table, being picked up by tweezers, with more gold behind it.Source: aerogondo2/ShutterStock.com

Assets Under Management: $56.8 billion

Expense Ratio: 0.40%

When investors want exposure to gold bullion without the hassles of storing it, they buy SPDR Gold Shares. At almost $57 billion in total assets, it’s the largest U.S.-listed gold ETF — and the 19th largest by assets of any U.S.-listed ETF.

Large institutions that hold GLD include Bank of America (NYSE:BAC) with $2.2 billion, Morgan Stanley (NYSE:MS) at $1.8 billion and UBS Group (NYSE:UBS) with $897 million.

When you buy GLD shares, you purchase a fractional interest in the SPDR Gold Trust, which currently holds 990.53 tonnes of gold bullion. The gold is held by HSBC Bank, the custodian, in their London vault. You can check out the gold bar list here.

Over the past 10 years, it’s delivered an annualized total return of 0.21%. As the price of gold has moved higher in recent years, the performance has been better. Over the past three years, its annualized total return is 13.4%, more in line with the entire U.S. market, which is up 23.1% over the same period.

When inflation rears its ugly head, investors reach for real assets. Of course, you can’t get any more real than gold. Historically, it’s been found to outperform other commodities in absolute and risk-adjusted returns over most periods.

If inflation remains at or around 6.2% in 2022, gold is projected to trade as high as $2,170 an ounce. Gold currently trades just below $1,800. Since 2000, gold has only traded above $2,000 on one brief occasion in August 2020.

ETFs to Buy: Schwab U.S. REIT ETF (SCHH)

Image of a man holding a key chain with a key and house attached to the key ring over a office desk in the backgroundSource: Shutterstock

Assets Under Management: $6.8 billion

Expense Ratio: 0.07%

The Schwab U.S. REIT ETF might not be the largest U.S.-listed real estate ETF — that distinction goes to the Vanguard Real Estate ETF (NYSEARCA:VNQ) — but it’s one of the cheapest at 0.07%.

The ETF tracks the performance of the Dow Jones Equity All REIT Capped Index, which is a float-adjusted market capitalization-weighted index that invests in all U.S.-listed public REITs exceeding $200 million in market cap and $5 million in daily trading over three months.

Rebalanced quarterly, each stock is capped at 10%. In addition, those stocks with weightings above 4.5% can’t exceed 22.5% cumulatively. Thus, the ETF’s manager would trim the stock’s weighting at the quarterly rebalance in both situations.

A study in Canada showed that over 20 years between 2000 and 2019, the price appreciation of new houses and farmland easily exceeded inflation. I think you’ll find the statistics in the U.S. are very similar.

Real estate has been an effective hedge against inflation in recent years. However, as inflation accelerates, the big question is whether real estate prices can keep pace.

Overall, the 9.1% annualized total return of SCHH since its inception in January 2011 hasn’t lit the world on fire. But then again, it’s done just fine through all kinds of different economic conditions.

That’s what you want from an inflation hedge.

Invesco Dynamic Energy Exploration & Production ETF (PXE)

Invesco logo in blue with mountain imageSource: Shutterstock

Assets Under Management: $135.5 million 

Expense Ratio: 0.63%

The bounce back of energy stocks would have to be one of the defining business stories of 2021. Down on their luck entering the pandemic, oil and natural gas prices have accelerated higher, making energy-related ETFs a popular commodity.

The Invesco Dynamic Energy Exploration & Production ETF might be tiny in terms of assets, but boy has it roared in 2021. In fact, PXE is up 105% year-to-date (YTD) and 108% over the past year.

The fund tracks the performance of the Dynamic Energy Exploration & Production Intellidex Index, which invests in 30 companies involved in the exploration and production of natural resources such as oil and natural gas. The index and fund are rebalanced and reconstituted four times a year in February, May, August and November.

While it’s not a cheap fund at 0.63% for passive management, it’s hard to complain too loudly when you’re getting a double in a single year.

The top 10 holdings account for 46% of its net assets. The average market cap of the 30 holdings is $19.4 billion.

If you’ve built a core portfolio of broad-based ETFs, PXE is an excellent tactical allocation to take advantage of rising energy prices and overall inflation. Once both of these cool, you can trim back or eliminate this holding.

With that in mind, ETFs to buy were made for this kind of tactical move.

ETFs to Buy: Vanguard Short Term Inflation-Protected Securities ETF (VTIP)

vanguard website displayed on a mobile phone screen representing vanguard etfsSource: Shutterstock

Assets Under Management: $18.1 billion

Expense Ratio: 0.05%

It shouldn’t come as a big surprise that TIPS (Treasury inflation-protected securities) ETFs saw record inflows in October. According to ETFDatabase.com, TIPS ETFs took in $6 billion in October, representing 35% of the month’s bond inflows.

“[W]ith inflation proving to be less transitory than originally thought, interest in Treasury Inflation-Protected Securities (TIPS) ETFs continues to accelerate,” ETFDatabase.com reported on Nov. 17 about State Street’s monthly report on ETF inflows. “TIPS funds took in a record $6 billion last month, their 18th month in a row with inflows (a time period when flows have never been below $1 billion).”

As Kevin O’Leary said, consumers are annoyed about inflation. As a result, they are making defensive moves such as buying the Vanguard Short Term Inflation-Protected Securities ETF to prevent their savings from eroding in value.

Given the current situation, it shouldn’t come as a surprise that VTIP is one of the 100 largest ETFs listed in the U.S.

At 0.05%, it’s an excellent way to preserve your wealth.

iShares MSCI Global Agriculture Producers ETF (VEGI)

iShares by Blackrock signSource: Sundry Photography / Shutterstock.com

Assets Under Management: $81.9 million

Expense Ratio: 0.39%

This particular ETF tracks the performance of the MSCI ACWI Select Agriculture Producers Investable Market Index. The index invests in global companies participating in the agriculture business. Potential companies for inclusion include producers of fertilizer and other agricultural chemicals, farm equipment, packaged foods and other agricultural-related firms.

To diversify globally, it invests at least 40% of its net assets in companies located or doing business outside the U.S.

The three sectors represented are Materials (34%) of the ETFs assets, Consumer Staples (34%) and Industrials (32%). The U.S. (53.8%), Canada (7.5%) and Norway (5.8%) are the three top countries by weight.

Deere & Co. (NYSE:DE) is the largest weighting at nearly 19% in terms of actual holdings. The next largest is the fertilizer company Nutrien (NYSE:NTR), at 7.2%.

Since its inception in January 2012, VEGI has generated an annualized total return of 6.7%. As inflation came out of its deep sleep in the past year, the ETF gained 38.2%.

The world’s food issues will only worsen, providing these 152 companies with a long and prosperous shelf life.

ETFs to Buy: Principal Quality ETF (PSET)

Colorful arrows pointing at the multicolored word "ETF" against a cement surfaceSource: shutterstock.com/eamesBot

Assets Under Management: $101.5 million

Expense Ratio: 0.15%

When it comes to fighting inflation, nothing works better than plain old pricing power. Companies that have it will continue to grow over the next year, while those that don’t will see both their financials and share prices take a hit.

The Principal Quality ETF is a five-star fund, according to Morningstar.com. It tracks the performance of the Nasdaq U.S. Price Setters Index, which itself is a selection of mid to large-cap stocks from the Nasdaq US Large Mid Cap Index.

The first thing the index does to select the ultimate holdings is to take the 550 top stocks by market cap in the Nasdaq US Large Mid Cap Index. It then ranks the stocks based on their pricing power. Finally, the top 150 stocks are selected for the index.

The top 50 stocks are given equal weights of 1%. The following 50 get equal weightings of 0.7%, and the final 50 are equally weighted at 0.3%. They are rebalanced annually in March. By doing this, it avoids investing in the usual group of large-cap stocks, leading to underperformance.

The ETF currently has 148 holdings. This happens when companies are acquired and taken private, etc. The average market cap is $58.7 billion. The top 10 holdings account for just 12% of the fund’s total assets.

Since its inception, the ETF has generated an annual return of 17.5%.

VanEck Inflation Allocation ETF (RAAX)

Assets Under Management: $26.5 million

Expense Ratio: 0.78%

In existence since April 2018, VanEck’s ETF may have only gathered $26.5 million in 3.5 years because it charges a hefty 0.78% expense ratio. It’s also possible that it hasn’t got any attention from investors because it invests in real assets, many of which have only come alive in the past year.

However, when you consider that the actively managed fund gives you access to 23 different ETFs in all 11 sectors, you begin to understand why it costs so much.

The top three sectors by weight are energy (26.6%), real estate (25.2%) and basic materials (21.4%). By region, North America accounts for 80.9% of the total assets. Next in line are developed European countries at 5.2%, followed by the Australasia area at 3.4%.

The top three holdings are Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (NASDAQ:PDBC) with a 20.1% weighting, Vanguard Real Estate ETF at 14.4% and the iShares Gold Strategy (BATS:IAUF) at 5.8%.

Heck, it even owns a little Bitcoin (CCC:BTC-USD) through a Canadian ETF.       

Overall, some might feel there are too many ETFs to buy. I get that. However, if you’re good with 0.78%, this is a good ETF to consider to ride these inflationary times.      

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.

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Economics

Major Asset Classes Post Wide Range Of Results For Last Week

US junk bonds and several slices of foreign fixed-income markets led a mixed run of returns for the major asset classes last week, based on a set of ETFs…

US junk bonds and several slices of foreign fixed-income markets led a mixed run of returns for the major asset classes last week, based on a set of ETFs through Friday’s close (Dec. 3).

The top performer: SPDR Bloomberg Barclays High Yield Bond (JNK), which rose 0.9%. The gain marks the first weekly advance for the fund in four weeks.

A variety of foreign-bond buckets posted follow-up performances, starting with investment-grade foreign bonds in non-US markets (PICB). Coming in second and third, respectively: foreign junk bonds (IHY) and government bonds issued by governments in emerging markets (EMLC).

Last week’s biggest loser: American equities. Vanguard Total US Stock Market (VTI) tumbled 2.0% — the ETF’s fourth-straight weekly loss. A widely cited economic release that triggered selling on Friday: sharply weaker-than-expected growth in US payrolls report in November. “A softer payrolls print pulled the rug beneath risk sentiment,” TD Securities advised in a note to clients.

The risk-off sentiment continued to weigh on the Global Market Index (GMI.F) — an unmanaged benchmark (maintained by CapitalSpectator.com) that holds all the major asset classes (except cash) in market-value weights via ETF proxies. GMI.F fell 1.0% — the index’s fourth straight weekly decline.

For the one-year trend, US real estate investment trusts continue to lead the major asset classes by a wide margin. US Real Estate (VNQ) is up 31.1% on a total-return basis.

US stocks (VTI) are in second place for the trailing one-year window, posting a 23.6% return.

There’s more red ink for one-year results lately. The biggest decline is currently in emerging-markets government bonds via VanEck Vectors JP Morgan EM Local Currency Bond (EMLC), which is down 9.1% as of last week’s close vs. the year-earlier level (after factoring in distributions).

Meanwhile, GMI.F is up 13.0% over the past year.

Deeper drawdowns continue to spread across the major asset classes. The smallest peak-to-trough decline as of Friday’s close is currently found in US inflation-indexed Treasuries (TIP), which ended the week at just 0.7% below the previous peak.

Current drawdowns slide rapidly from there, with the majority of ETFs now reporting peak-to-trough declines of roughly -5% or deeper.


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Oil moves higher, gold drifting

Saudi Arabia/Omicron lifts oil prices in Asia Oil prices eased on Friday on omicron fears, Brent crude falling 0.90% and WTI falling by 1.45%. The falls…

Saudi Arabia/Omicron lifts oil prices in Asia

Oil prices eased on Friday on omicron fears, Brent crude falling 0.90% and WTI falling by 1.45%. The falls were modest though by recent standards where the intraday volatility had threatened to make oil almost untradeable. The commitment of traders’ positioning also shows a massive drawdown in speculative long positioning, making exposure more balanced, also a supportive factor.

Oil prices have rallied sharply in Asia after Saudi Arabia yesterday announced January price increases to Asian and US customers, and weekend reports from South Africa suggested omicron was less harsh than previous variants. Brent crude is 2.10% higher at USD 71.35 a barrel, and WTI is 2.0% higher at USD 67.75 a barrel.

I am struggling to construct a positive narrative out of Saudi Arabia raising prices, especially as it makes competing grades more appealing to their client base. The best I can do is that Saudi Arabia feels confident raising prices despite higher OPEC+ production because it believes omicron is a storm in a test tube and that the global recovery will not be derailed. The South African reports have reinforced that sentiment.

Whether that sentiment lasts or not, the relative strength indexes (RSIs) that I mentioned last week remain near oversold suggesting that any oil sell-offs from here will be shallower and shorter in nature. Brent crude needs to reclaim USD 73.00, and WTI USD 70.00 a barrel to tentatively say the lows are in place. If omicron is proven over the coming days (or weeks) to be less aggressive, even if it is more contagious, then we can say 100% that last week’s lows were the bargain of the quarter, and possibly for H1 2022, for those brave enough to indulge.

Gold remains forgotten

Gold remains side-lined, trading sideways on a closing basis, despite some decent intraday ranges. On Friday, thanks to a mixed US employment report leading to a flattening yield curve, gold managed to gain 0.88% to USD 1783.90 an ounce. In Asia, gold is barely changed, easing 0.10% lower to USD 1781.70 an ounce.

In the bigger picture, gold looks set to trade in a rough USD 1770.00 to USD 1800.00 an ounce range this week, unable to sustain momentum above or below those levels. The 50,100 and 200-day moving averages (DMAs), clustered between USD 1791.00 and USD 1793.00 provide immediate resistance, followed by USD 1800.00. Support lies at USD 1770.00 and USD 1760.00.

With the omicron outlook looking less bleak, and with longer-dated US yields continuing to fall, gold could well stage a modest recovery this week. However, with the US CPI data on Friday likely to print around 7.0%, gold remains a sell on rallies to USD 1810.00. A 7.0% print will raise the faster taper and rate hike noise ahead of next week’s FOMC meeting, and longer-dated yields could finally shake off their medium-term inflation lethargy. The balance of risks still favours a move lower towards USD 1720.00 an ounce.


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Economics

China Cuts RRR By 50bps; More Easing Expected

China Cuts RRR By 50bps; More Easing Expected

Just last night we predicted that China would cut its Required Reserve Ratio "Within A Week",…

China Cuts RRR By 50bps; More Easing Expected

Just last night we predicted that China would cut its Required Reserve Ratio “Within A Week”, and not even six hours later, that’s precisely what happened when the PBOC announced that it would cut the amount of cash banks must hold in reserve, acting to counter the economic slowdown in a move that puts the central bank on a different policy path than many of its peers.

Specifically, the PBOC cut the RRR by 50bps effective 15th Dec. The move will release CNY 1.2 trillion in liquidity – some of this new money will be used by banks to repay maturing loans from the PBOC’s medium-term lending facility and some of it will be used to replenish financial institutions’ long-term capital, the central bank said. There are almost 1 trillion yuan worth of the 1-year loans maturing on Dec. 15, the day the cut takes effect.

“The aim of the RRR cut is to strengthen cross-cyclical adjustment, enhance the capital structure of financial institutions, raise financial services capabilities to better support the real economy,” the PBOC said. The cut will effectively increase long-term capital for banks to serve the real economy, and the PBOC will guide banks to step up their support for small businesses, it said.

The cut is a “regular monetary policy action,” the PBOC said, pre-empting expectations that the decision was the start of of an easing cycle, although that’s what the PBOC always says – the fact that it has again capitulated and has eased for the first time since July confirms that Beijing is now looking for excuses to cut, not the opposite, and with Evergrande set to default as soon as today, it will find them. “Prudent monetary policy direction has not changed,” it said, adding that the bank “will continue with a normal monetary policy, maintaining the stability, consistency and sustainability of policy, and won’t flood the economy with stimulus.”

Among other things, the PBOC:

  • Reiterates that liquidity will be kept reasonably ample.
  • Will step up cross cyclical adjustments.
  • Will not resort to flood-like stimulus.
  • Will reduce capital costs for financial institutions by around CNY 15bln per annum.

With the U.S. Federal Reserve and other global central banks looking to tighten policy, the move to add stimulus by the PBOC makes the divergence between China and much of the rest of the world even clearer.

A cut in the reserve ratio doesn’t directly lower borrowing costs, but quickly frees up cheap funds for banks to lend. The reduction will lower the capital cost for financial institutions by about 15 billion yuan each year, which will lower the overall financing cost of the economy, the PBOC said.

As noted last night, the RRR cut was telegraphed last week by Premier Li Keqiang when he said that authorities would cut the RRR at an appropriate time to help smaller companies, and is the second reduction this year. The decision comes after recent data showed the economy and industry stabilizing, although Beijing’s tightening curbs on the property market have led to a slump in construction and worsened a liquidity crisis at developer China Evergrande Group and other real-estate firms.

In immediate reaction to this RRR cut, modest upside was seen in the equity space with US futures rising to marginal fresh highs for the session and European counterparts erring higher as well but remaining within ranges. Amidst this the FX space saw some modest choppiness, though USD/CNH is within pre-release levels. Additionally, WTI Jan and Brent Feb futures respectively experienced upside, bringing them back to overnight highs of around USD 2.00/bbl.

While some said the development was neutral and underscores China’s lack of desire to pump the system with excess liquidity, after all the PBOC said  it “will continue with a normal monetary policy, maintaining the stability, consistency and sustainability of policy, and won’t flood the economy with stimulus”, we disagree and believe this is the start of a move that will inject much more liquidity in China’s economy, especially now that coal prices are sliding and oil has plunged from its recent highs, keeping inflation in check.

Indeed, in their kneejerk responses to China’s easing, analysts said that China will need to cut banks’ reserve ratio further to boost risk assets, given its stance of fine-tuning monetary policy has already been somewhat priced in by the domestic financial markets.

Below, courtesy of Bloomberg, is a snapshot of what market participants said.

Shenzhen Flying Tiger Investment & Management (Yu Dingheng, managing director)

  • “We are in the midst of a policy shift. If we consider this cut and the one in July — there should be more to follow as this is not yet enough to counter the downward pressure”
  • “This is all within expectations” and the market had already reacted to it partially in today’s session
  • The firm recently positioned for a move like this by picking up undervalued shares of companies in the property-related cohort

Bocom International (Hao Hong, head of research)

  • “I expect more cuts, because the property situation is still unfolding and cutting interest rate is not practical given high inflation”
  • RRR cut is the easiest and it is within the PBOC’s control, given it doesn’t need to be signed off by the State Council, China’s cabinet
  • A cut at this point in time can boost liquidity just in case, even though the market doesn’t lack liquidity, and can also boost some confidence as the central bank shows “its willingness to support if the bottom falls out”

Standard Chartered (Becky Liu, head of China macro strategy)

  • RRR cut may have been brought forward by concerns about potential China Evergrande contagion risks
  • “This is still faster than the median forecast, as some were still looking for the cut to come in the coming several weeks or even in Q1”
  • Slowdown in economic conditions point to more easing
  • Announcing the cut will allow banks to lend more at the start of next year to boost credit growth and “hopefully start to be reflected in real economic activities by mid-2022”

Shenzhen Frontsea Asset Management (Hou Anyang, fund manager)

  • “Market is still going to focus on the fact that help is needed in the flagging economy, rather than the fact that help has come”
  • Market reflected a lot of the optimistic expectations today, and while this may be a policy shift rather than fine tuning, “we’ve not hit the bottom in terms of fundamentals yet”

Zhuhai Greenbamboo Private Fund Management (Jiang Liangqing, managing director)

  • “It’s too early to call it shifting of gears, though it should be more than a marginal move considering the impending concerns over property”
  • The RRR cut shows “that the higher-ups are paying close attention to the risks of the housing market, and making it a priority”
  • Investors can be “a bit more optimistic” on the policy outlook next year, and the policy bottom for real estate has passed so we need only wait a few more months for fundamentals to bottom out”

Nanjing Securities (Hao Yang, analyst)

  • China’s 10-year bond yields should stay in the 2.8%-2.9% range with limited boosts from the RRR cut as market waits to see whether the easing would be effective in offsetting growth headwinds
  • The timing of the RRR cut is sooner than market expectation, “showing the PBOC’s strong will to ease concerns on property strains due to Evergrande contagion risks”
  • The unleashed funds from RRR cut should help lowering funding costs for banks who are expected by regulators to step up credit supports for the real economy

Bloomberg (David Qu, economist)

  • “We think the reduction would help offset the headwinds facing the economy, particularly in the first quarter of 2022.
  • We maintain our view that an additional 50-100 basis points of RRR cut would come next year.”

Tyler Durden
Mon, 12/06/2021 – 07:24







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