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)
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)
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)
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)
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)
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)
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)
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.
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