The stock market has recovered and galloped ahead since a major correction in March 2020. And the U.S. economy has been showing a solid recovery this year, which is evidenced by its 6.4% annual GDP growth in the first quarter of 2021.
Among other favorable economic data, consumer spending is steadily returning to pre-pandemic levels thanks to fiscal stimulus packages and steady job growth. However, this is creating inflationary pressure in the economy. And because investors typically rotate away from stocks to safer, fixed-income assets in an inflationary economy, some experts expect the stock market to be under pressure in the near term.
Notably, the consumer price index (CPI) jumped 4.2% in April 2021 from its year-ago level, its fastest in growth rate 13-years, and increased 0.8% from the prior month. To put things in perspective, consumer spending, which accounts for more than two-thirds of domestic economic activity, also climbed 10.7% in the first quarter of 2021, following a mere 2.3% increase in the fourth quarter of last year. And, according to Statista, the annual rate of inflation this year is expected to be 2.26%. Though the Fed views any rise in inflation as temporary, economists fear that rising inflation might force the central bank to tighten its monetary policies earlier than expected.
Amid this scenario, we think the following exchange traded funds (ETFs) that have broad and diversified exposure to asset classes that perform well in in inflationary environments could be solid bets: iShares TIPS Bond ETF (TIP), Invesco DWA Basic Materials Momentum ETF (PYZ), SPDR Gold Trust (GLD), and Vanguard Real Estate ETF (VNQ).
iShares TIPS Bond ETF (TIP)
TIP tracks the investment results of Bloomberg Barclays U.S. Treasury Inflation Protected Securities (TIPS) Index (Series-L), a market-value-weighted index of TIPS with at least one year remaining to maturity. Because the fund is composed of government issued securities, the ETF is less t risky and thus delivers a relatively meager yield. However, TIP has become popular as a way to protect asset values against intermediate-term inflation.
TIP has an MSCI ESG Fund Rating of A based on a score of 6.10 out of 10. The ETF has $27.77 billion in AUM and a 0.19% expense ratio. The fund pays a $1.71 annual dividend, yielding 1.34%.
TIP currently holds 56 Treasury securities. The ETF has a 22.7% exposure in bonds that mature in three to five years, followed by a 21% weighting in securities that mature in seven to 10 years. The fund is also exposed to long-term bonds, and currently holds more than 15% in tenors beyond 20 years. TIP presently has an effective duration of 7.53 years and convexity of 1.08.
It’s true that buying fixed-income securities in an inflationary environment seems counterintuitive. However, inflation-protected bonds offer robust nominal returns in an inflationary environment, unlike its unprotected securities in the bond universe. Consequently, TIP closed yesterday’s trading session at $128.00, returning 5.3% over the past year. The fund has attracted net inflow of more than $1 billion over the past month and is up 1.2% in the same period. Furthermore, the ETF hit its $128.29, 52-week high last week.
TIP’s strong fundamentals are reflected in its POWR Ratings. The ETF has an overall A rating, which translates to Strong Buy in our proprietary rating system. TIP also has an A grade for both Trade and Buy & Hold. TIP is ranked #1 of 16 ETFs in the B-rated Inflation-Protected Bond ETFs group.
Beyond what we’ve stated above, we have also given TIP grade for Peer. Get all TIP’s ratings here.
Invesco DWA Basic Materials Momentum ETF (PYZ)
PYZ provides exposure to the domestic basic materials sector. Companies in this sector are principally engaged in extracting and producing raw materials, including paper, wood products, chemicals, construction materials, and mining and metals. Increased consumer purchasing power has been driving strong demand for consumer and business goods. This in turn is creating strong momentum in the materials sector.
PYZ is based on the Dorsey Wright Basic Materials Technical Leaders Index that selects and weights stocks by price momentum. The fund has an MSCI ESG Fund Rating of A based on a score of 5.73 out of 10. The ETF currently has $176.97 million in AUM and a 0.60% expense ratio. PYZ pays a $0.63 annual dividend, which translates into a 0.68% dividend yield.
PYZ is unique within its category due to the nature of its underlying index. The index uses quant-based screening techniques to identify companies deemed to maintain the greatest potential for capital appreciation. The fund has a small-cap value bias and is nearly 42% allocated to that style. The ETF also has 42% exposure to the Chemical and Metal & Mining sectors. Its top three major holdings (out of 37 stocks in the fund) are Steel Dynamics Inc (STLD), United States Steel Corp (X) and Freeport-McMoRan Inc (FCX).
PYZ closed yesterday’s trading session at $93.37, gaining more than 30% year-to-date. In addition, the ETF has saw net inflow of $127.64 million over the past three months and has gained 21.1% during the same period.
PYZ’s POWR Ratings reflect a promising outlook. PYZ has an overall A rating, which equates to Strong Buy in our proprietary rating system. It has an A grade for both Trade and Buy & Hold. The ETF is ranked #28 of the 112 ETFs in the A-rated Commodity ETFs category.
Click here to check additional POWR Ratings for PYZ (Peer).
SPDR Gold Trust (GLD)
GLD is one of the most popular ETFs in the world that offers exposure to safe-haven gold in a very efficient way. The ETF tracks the gold spot price using gold bars held in London vaults and seeks to reflect the performance of the price of gold bullion. The spot price for gold bullion is determined by market forces in the 24-hour global over the counter (OTC) market for gold.
GLD has become extremely popular in recent years and investors have been taking on exposure to the ETF primarily as a way of hedging against equity market volatility and U.S. dollar weakness. The product is structured to reduce the challenges of buying, storing and insuring physical gold bullion for investors. The Trust holds gold bars and from time to time distributes gold in connection with redemptions of baskets.
GLD is the first U.S. traded gold ETF that invests directly in physical gold. The fund has $60.28 billion in AUM, with a 0.40% expense ratio.
Gold faced intense selling pressure after hitting an all-time high last August on investor optimism about the potential for a robust global economic recovery with a mass COVID-19 vaccination drive. As a result, the ETF has witnessed an $11.68 billion net outflow over the past six months. However, because increasing purchasing power is driving rising inflation, GLD has witnessed seen a $167 million net inflow over the past month. In fact, GLD has gained 5% over the past month to close yesterday’s trading session at $172.69.
It is no surprise that GLD has an overall B rating, which equates to Buy in our POWR Ratings system. GLD has an A grade for Trade, and a B for Buy & Hold. It is ranked #10 of 36 ETFs in the Precious Metals ETFs group.
In addition to the POWR Ratings grades we’ve just highlighted, one can see the GLD’s ratings for Peer and Category, here.
Vanguard Real Estate ETF (VNQ)
VNQ seeks to closely track the performance of the MSCI US IMI Real Estate 25/50 Transition Index, which is a gauge of real estate stocks and other types of real estate companies, such as those involved in services and development as well as other REITs. The ETF’s market-cap allocations mirror those of the neutral benchmark.
The only place VNQ deviates from a typical real estate ETF is its sector bias away from specialized REITs in favor of commercial REITs. During inflationary periods, investors gravitate to commercial real estate not only for potential capital appreciation but also for an upswing rental income. VNQ offers broad exposure to companies involved in the ownership and operation of such real estate.
VNQ has an MSCI ESG Fund Rating of BBB, based on a score of 4.70 out of 10. The ETF currently has $37.48 billion in AUM and a 0.12% expense ratio. VNQ also pays a $3.21 annual dividend, which translates to a 3.31% yield.
In terms of exposure, VNQ is heavily allocated to Specialized REITs with a 40% weighting. The portfolio also has a 39% and 13% exposure to Commercial REITs and Residential REITs, respectively. The top three of the fund’s 174 holdings are Vanguard Real Estate II Index Fund (VRTPX), American Tower REIT Corp (AMT) and Prologis REIT Inc (PLD).
VNQ closed yesterday’s trading session at $97.18, with a 14.4% year-to-date gain. The ETF is up 12.5% over the past six months and has seen a $3.36 billion net inflow during the same period. In fact, VNQ had hit its $99.57, 52-week high earlier this month and is currently trading just 2.4% below it.
VNQ’s POWR Ratings are consistent with its promising outlook. VNQ has an overall A rating, which equates to Strong Buy in our proprietary rating system. It has an A grade for both Trade and Buy & Hold. The ETF is ranked #1 of 28 ETFs in the A-rated Real Estate ETFs category.
Click here to see the additional POWR Ratings for VNQ (Peer).
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TIP shares were trading at $127.90 per share on Tuesday morning, down $0.10 (-0.08%). Year-to-date, TIP has gained 0.85%, versus a 11.53% rise in the benchmark S&P 500 index during the same period.
About the Author: Sidharath Gupta
Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...
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