Inflation to Stay Hot in Early 2022: ETF Strategies to Win

Talks of rising inflation in the United States as well as several other economies are rife this year. Massive monetary policy easing, fiscal stimulus, improving job market, widespread vaccination and last but not the least supply chain disruption amid pandemic-induced manufacturing and shipping turmoil led to the inflationary pressure.

The Consumer price inflation jumped at its fastest annual pace in nearly 40 years in November in the United States. The datapoints were almost in line with market expectations. It represented the 9th successive month the inflation that stayed above the Fed's 2% target.

Renewed virus outbreaks in the form of Omicron, China’s zero-Covid policy and expected trade volatility during the Lunar New Year may continue to pose threat to supply chains for now, per trade credit insurer Euler Hermes, as quoted on CNBC.

However, a slowdown in consumer demand, solid inventory levels and increased shipping capacity will likely normalize supply chain in the second half of 2022. Hence, we expect inflation to cool down in the second half of next year.

However, till then, investors should be able to protect their portfolio from the inflation threat. For that, we have highlighted a few ETF investing strategies below.

Bet on Real Estate

With higher demand and an uptrend in inflation, home prices have been uphill. Thanks to rising home prices, affordability is falling. Demand for renting has been increasing, which in turn is giving a push to shelter costs. This means exposure to real estate could be inflation-beating. Interest rates are still at pretty low levels, which make real estate investing lucrative.

Real Estate Select Sector SPDR ETF XLRE is a good play out here. XLRE charges 12 bps a year and yields 2.84% annually versus 1.48% yield offered by the benchmark U.S. treasury yield as of Dec 10, 2021.

Beat Inflation with Small-Cap Companies

Small-cap stocks, which, since 2010, have topped large-cap competitors when inflation forecasts rose, according to CME Group (NASDAQ:CME), as quoted on the Motley Fool. This happens because due to smaller of operation, small-cap companies can deal with inflationary pressures by quickly increasing prices or changing their source goods and materials.

Plus, if lack of shipping capacity is becoming an issue now, then small-caps are stand to gain here as these are normally domestically-focused and are less-dependent on the overseas backdrop as well as the huge requirement of shipping.

Bet on Value ETFs

As we know, the higher the inflation rate, the more interest rates are likely to rise. This happens because lenders will demand higher interest rates in order to make up for the decline in purchasing power of the money that lenders will be repaid in future.

In the current backdrop, the Fed is expected to speed up the QE taper, which is likely to result in a rise in rates. And rising rates are good for value stocks than the growth ones as the latter’s cash flows come way out in the future, as indicated by New York University finance professor Aswath Damodaran, as quoted on CNBC. Vanguard Value ETF VTV is thus a good bet.

Bet Big on Banks

Yet another beneficiary of rising rates is banks. As banks seek to borrow money at short-term rates and lend at long-term rates, a steepening yield curve earns more on lending and pay less on deposits, thereby leading to a wider spread. This expands net margins and increase banks’ profits. Invesco KBW Bank ETF KBWB should thus be on radar now.

Play Inflation-Protected ETFs

Thanks to the growing reach of the ETF industry, we now have several ETFs that offer exposure to tackle the inflationary pressure. These ETFs are ProShares Inflation Expectations ETF RINF, Horizon Kinetics Inflation Beneficiaries ETF INFL and Quadratic Interest Rate Volatility and Inflation ETF (IVOL).

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