Top funds that are built for inflation.
U.S. price inflation just hit a 40-year high, and as a result, the Federal Reserve has embarked on the most aggressive tightening of monetary policy since the early 1990s to keep prices from rising significantly higher. The resulting volatility on Wall Street has caused a lot of headaches for investors, with the S&P 500 index down about 20% so far this year. But not all investments have been as hard hit by the current conditions, and a number of exchange-traded products are actually tailor made for an inflationary environment. Here are seven options if you’re looking for exchange-traded funds, or ETFs, to fight inflation right now.
Materials Select Sector SPDR Fund (ticker: XLB)
When prices are rising, the companies that produce raw materials as the first step of the supply chain tend to benefit. And the simplest way to get exposure to businesses like chemical producers, miners or other materials-related firms is to buy XLB. This is the leading fund in the sector, with more than $6 billion in total assets. Its holdings include every stock in the sector that is present in the S&P 500 index, including chemicals firm Linde PLC (LIN), mega-miner Newmont Corp. (NEM) and steel manufacturer Nucor Corp. (NUE). As materials firms aren’t a significant part of the S&P 500 — they only make up about 3% of the entire index — there are only 28 total components in this fund. Still, if you want large materials stocks as a hedge against inflation, this fund is worth a look.
Energy Select Sector SPDR Fund (XLE)
Sticking with the sector-specific options among inflation ETFs, it’s also worth pointing out that inflationary pressures have sent the price of energy through the roof. And with crude oil prices above $100 per barrel, more than four times their pandemic-era low, it’s worth looking for exposure to the energy sector to help tap into this uptrend. XLE is the top fund by size in this corner of the market, with some $36 billion in assets under management. Top holdings are a who’s who of the oil patch, with Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX) at the front of the pack. But like the aforementioned materials fund, the selection is limited to a short list, with only 21 holdings as of this writing.
Horizon Kinetics Inflation Beneficiaries ETF (INFL)
Though sponsored by the smaller ETF shop Horizon Kinetics, INFL is a well-established fund with more than $1 billion in assets under management. The fund is a tactical and actively managed offering that has just under 40 total holdings, selected precisely for their potential to outperform in an inflationary environment. Specifically, its managers look for assets with values mainly derived from physical goods or properties and assets with revenues that are “expected to increase with inflation without corresponding increases in expenses.” But these hand-picked stocks aren’t the usual suspects that you’ll find in other funds, with holdings that include agribusiness giant Archer-Daniels-Midland Co. (ADM), as well as smaller and low-profile plays like oil and gas exploration firm Texas Pacific Land Corp. (TPL).
Fidelity Stocks for Inflation ETF (FCPI)
The smallest inflation ETF on this list, FCPI has only about $250 million in total assets under management. However, the fund is unique in that it takes a much broader approach than the prior inflation-specific fund by targeting high-quality mid- and large-cap stocks with attractive valuations and strong price momentum in addition to the potential to hold up amid inflationary pressures. That makes for an odd list, with top holdings that include tech giant Apple Inc. (AAPL) right alongside more intuitive firms like Marathon Oil Corp. (MRO). If you want to take a less overt approach to inflation-sensitive stocks, this Fidelity fund could be a way to supplement your normal strategy rather than go all in on materials or commodity companies.
SPDR Gold Shares (GLD)
Of course, if you want a hedge against inflation, you can also invest directly in the materials themselves instead of just in the producers or processers of commodities. GLD is the go-to example of a hard-asset investment, as its strategy focused on physical gold bullion and not publicly traded stocks. It’s the most liquid and established gold ETF out there, with more than $60 billion in total assets and average volume north of 8 million shares traded daily. Gold has a reputation as an uncorrelated investment and a hedge against rising prices, so if you’re looking to invest in this precious metal, then GLD is one of the most popular ways to do so on Wall Street.
Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC)
Like the idea of investing directly in commodities but don’t want to limit yourself to gold? Then consider this Invesco fund that commands about $10 billion in assets and is benchmarked to a basket of the 14 most heavily traded commodity futures contracts, including oil, gold and corn. To be clear, a number of these holdings are energy-related, including gasoline, low-sulfur diesel fuel and two forms of crude oil. However, these are the most popular contracts for a reason and are tied to goods with huge baseline demand in the real economy — and thus significantly affected by inflationary pressure. Best of all, this ETF doesn’t require you to open a futures trading account or deal with complicated K-1 tax forms. Simply trade PDBC in your brokerage account as normal, without any extra hassle.
Simplify Interest Rate Hedge (PFIX)
As mentioned in the introduction to this article, rising prices and rising rates tend to go hand in hand as central banks tighten monetary policy to keep surging costs under control. So rather than invest directly in the trend of inflation, you can choose to get exposure to the related trend of rising rates via PFIX. This Simplify fund is among the best-performing funds year to date, with a phenomenal return of more than 50% through June 22, proving it’s not just effective as a hedge but also as a profit generator. Just keep in mind that its performance is based on investments in interest rate options, so whenever rates normalize or start moving lower, you could see declines that are just as significant. But given the very clear intentions of the Fed and the persistent threat of steep inflation, that doesn’t seem very likely anytime soon.
7 ETFs to fight inflation:
— Materials Select Sector SPDR Fund (XLB)
— Energy Select Sector SPDR Fund (XLE)
— Horizon Kinetics Inflation Beneficiaries ETF (INFL)
— Fidelity Stocks for Inflation ETF (FCPI)
— SPDR Gold Shares (GLD)
— Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC)
— Simplify Interest Rate Hedge (PFIX)
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7 of the Best ETFs to Fight Inflation originally appeared on usnews.com
Update 06/23/22: This story was published at an earlier date and has been updated with new information.
