Inflation a popular theme for ETFs

As inflation hovers near 40-year highs, it is no wonder that rising prices are the top concern on many investor’s minds right now. Evidence of this worry can be seen in the flows to ETFs that are designed to perform well in an inflationary environment. ETFs with the word “inflation” in the name have seen strong interest from investors so far this year, with some even gathering over $1 billion since the start of the year.
There are 24 ETFs with the word inflation in the name of the fund, and 16 have seen inflows year-to-date. But despite their similar names, the holdings within the ETFs can vary dramatically as can their performance. 

TIPS - a popular choice

These bonds have a unique feature that indexes the principal to the rate of inflation. Given that the bond market already prices inflationary expectations into the market, TIPS tend to perform well when inflation is higher than expected. 

In 2021, the word ‘transitory’ was often used to describe what was seen as a temporary rise in inflation. Throughout the course of the year, inflation skyrocketed, reaching its highest level in nearly 40 years.  This divergence between expectations and reality benefitted TIPS ETFs, with TIP gaining 5.7% for the year compared to a 1.8% loss for the iShares Core U.S. Aggregate Bond ETF (AGG).

TIPS tides have turned

Buyers of TIPS ETFs have seen losses this year, however. As the Federal Reserve moves to tamp down inflation, TIPS have been selling off with the rest of the bond market. As of May 20, TIP has fallen by -6.4% this year, though this is still outperforming AGG which is down -9.0%.

The other TIPS ETFs are all in negative territory as well, with longer-dated TIPS funds being the most negatively affected. The PIMCO 15+ Year U.S. TIPS Index ETF (LTPZ) has fallen by -20.0% so far this year.

One unique take on TIPS is in the green so far this year. The ProShares Inflation Expectations ETF (RINF) is up 5.4% year-to-date. This fund tracks a TIPS index while shorting exposure to Treasuries of equal maturity, which means it performs well when Treasury yields rise relative to TIPS yields.

Equity inflation ETFs have protected

The Horizon Kinetics Inflation Beneficiaries ETF (INFL) is an actively managed ETF that invests in global companies that are expected to benefit from inflation. Top sectors in this ETF include Financials, Materials, and Energy which in aggregate make up nearly ¾ of the portfolio.

Relative to the SPDR S&P 500 ETF (SPY) which has fallen by -17.7% so far this year, these equity-focused funds are doing quite well though not in positive territory. FCPI has fallen by -7.8% while INFL is down -1.5%.

Commodities a bright spot 

The Harbor All-Weather Inflation Focus ETF (HGER) has only been around since February but has gained over 15% so far this year through its allocation to commodities which are deemed to be the most sensitive to CPI. Top holdings include a slew of petroleum-based commodities as well as gold, which together make up 2/3 of the portfolio.

Other ETFs that hold an allocation to commodities are constructed as multi-asset portfolios, meaning they offer exposure to several asset classes within one ETF. The VanEck Inflation Allocation ETF (RAAX) offers exposure to real assets, including real estate, commodities, natural resources, and infrastructure. This ETF has gained 7.1% so far this year.

Some newer funds fall into this category too, such as the AXS Astoria Inflation Sensitive ETF (PPI) which is up 6.2% year-to-date. The Amplify Inflation Fighter ETF (IWIN) is another multi-asset option, though holds a hefty exposure to bitcoin which helps to explain its negative performance year-to-date.

The flows into these funds, including those that are newer to market, is proof that investors are interested in investing around this theme. Though there are signs that inflation could be peaking, time will tell whether the Federal Reserve will be successful in bringing the measure under control. Until then, expect these ETFs to continue to garner investor attention.

Disclaimer: This article is limited to the dissemination of general information pertaining to investment strategies and financial planning and does not constitute an offer to issue or sell, or a solicitation of an offer to subscribe, buy, or acquire an interest in, any securities, financial instruments or other services, nor does it constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment.