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ETF Trades to Combat Hot Inflation Data

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After the stupendous Wall Street rally in October and a solid start to November, it seems the party on the bourses has come to a halt. Investors have started worrying about the hot inflation data releases amid the Fed’s stance of calling inflation levels ‘transitory’.

– Zacks

According to the Federal Reserve, a major part of the inflation has been triggered by the pandemic-driven supply-demand imbalance, which might get resolved in a few months (per a CNBC article). The rising inflation levels are impacting different sectors like food, energy, shelter and cars. In this regard, Delos Capital Advisors chief investment strategist Andrew Smith has commented that “This isn’t just now focused on used car sales, apparel. You’re seeing a broadening across the entire base,” per a CNBC article. He has also mentioned that “All of this is manifesting to an inflationary point that’s showing that it’s not as transitory as they were making it out to be,” according to the same article.

Per the latest Labor Department report, the Consumer Price Index (CPI) in October rose 6.2% year over year compared to the Dow Jones estimate of a 5.9% rise, per a CNBC article. The metric came in at the highest level since December 1990 and covers a basket of products ranging from gasoline and health care to groceries and rents. It also increased 0.9% for the month, surpassing the 0.6% Dow Jones estimate. The soaring food, used vehicles and energy prices might be primarily responsible for the higher inflation levels.

Excluding food and energy prices, the core CPI was up 0.6%, worse than the estimate of 0.4%. Annual core inflation also increased at a 4.6% pace, in comparison with the 4% expectation and came in at the highest level since August 1991 (per a CNBC article).

The International Monetary Fund had earlier asked the Federal Reserves and its peers across the globe to prepare for a backup plan if the inflation levels remain persistently high, per a CNBC article. Thus, investors are now getting mentally prepared for the interest rate hikes to happen sooner than expected or the Fed’s move to taper the bond purchases.

Notably, the hot inflation data has compelled investors to look for alternative investment options that may fare better than cash or bonds in an inflationary environment. Moreover, certain companies with compromised pricing power may take a severe hit amid inflation and future earnings may also look less attractive amid high inflation levels. Following the release of inflation data, the SPDR Gold Shares fund was up 0.8% on Nov 10.

Against this backdrop, let’s take a look at some ETF trades that can be considered:

Gold ETFs to Hedge Inflation

Considering the current scenario, gold prices have been rising. The inflationary backdrop in the United States is favorable for gold as the metal is viewed as a hedge against inflation.

John Feeney, business development manager at Sydney-based bullion dealer Guardian Gold Australia, has earlier said that “Gold might actually start catching a strong bid if high inflation persists, which is a big switch from earlier in the year where taper fears dominated inflation fears. Historically, gold tends to perform very well in inflationary environments, so it makes sense for the market to turn bullish if inflation continues to beat,” according to a Bloomberg article.

Gold ETFs mostly move in tandem with gold prices. The SPDR Gold Shares GLD and iShares Gold Trust IAU are some of the popular ETFs. GLD and IAU carry a Zacks ETF Rank #3 (Hold) and have a Medium-risk outlook (read: Best Inverse/Leveraged ETFs of Last Week).

TIPS ETFs at Rescue

TIPS ETFs offer robust real returns during inflationary periods, unlike its unprotected peers in the fixed-income world. It not only provides shelter from increasing prices but also protects income for the long term. While there are several options in the space to tap the rising consumer prices, we have highlighted iShares TIPS Bond ETF TIP and Schwab U.S. TIPS ETF SCHP, which can be a compelling investment. TIP and SCHP have High-risk outlook (read: Global TIPS ETFs to Play Now).

Bitcoins Gaining Popularity as ‘Digital Gold’

According to The Guardian report, bitcoin is generally seen as an alternative to the traditional safe-haven investment — gold. Some analysts are also expecting to see tough competition between both assets in the near future. According to the market pundits, growing retail interest in bitcoin may soon be observed as a form of digital gold. In fact, following the release of hot inflation data, the first fund to track the ProShares Bitcoin Strategy ETF BITO was up 0.4% on Nov 10 (read: Top ETF Stories of October).

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SPDR Gold Shares (GLD): ETF Research Reports
iShares Gold Trust (IAU): ETF Research Reports
iShares TIPS Bond ETF (TIP): ETF Research Reports
Schwab U.S. TIPS ETF (SCHP): ETF Research Reports
ProShares Bitcoin Strategy ETF (BITO): ETF Research Reports
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Zacks Investment Research

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