Navigating rising US inflation with ETFs

May 8th, 2018 | By | Category: ETF and Index News

The Lyxor ETF research team has looked into the potential effects rising inflation could have on US ETF allocations for investors—specifically regarding exposures to inflation-protected bonds, commodities and energy stocks.

US inflation could be approaching soon.

US inflation could be approaching soon.

Their research points to several reasons why US inflation may return:

“Over the last twelve months, oil prices have shot up by almost 30%. The US economy is now at “full” employment, with businesses reporting a shortage of skilled workers and an unemployment rate below 5%.

“Wage growth—initially sluggish—has also started to pick up in recent months, albeit without inducing major wage gains as yet.

“According to OECD estimates, growth should remain above potential this year with the usage of industrial production capacity currently running at close to 80%. We believe such pressures in the productive apparatus will eventually translate into higher consumer prices.”

“Our research shows assets related to inflation tend to perform well in the more advanced stages of the economic cycle.”
– Lyxor ETF

Lyxor argues that assets related to inflation—such as commodities, energy stocks and inflation-linked bonds—tend to perform well in the latter stages of the economic cycle and that the expansion in the US is undoubtedly entering old age.

For investors who share the Lyxor view, there are a range of ETFs available to position portfolios to best navigate this market environment.

The Lyxor US TIPS (DR) UCITS ETF (TIPH LN) provides exposure to US Treasury inflation-protected securities (TIPS). The principle of a TIPS increases with inflation and decreases with deflation, as measured by the Consumer Price Index. When a TIPS matures, investors are paid the adjusted principal or original principal, whichever is greater.

TIPH tracks the Bloomberg Barclays US Inflation Linked Bonds Index and currently has assets under management of just under $400 million. It has a total expense ratio (TER) of 0.20%.

Other options which track the same index are the iShares $ TIPS UCITS ETF USD (ITPS LN) or SPDR Barclays U.S. TIPS UCITS ETF (UTIP LN). ITPS is the largest of the three funds with over $2.3 billion in AUM but comes with the highest TER of 0.25%. UTIP has the lowest TER of 0.17% and around $600m of AUM.

The Lyxor Commodities CRB Thomson Reuters/CoreCommodity UCITS ETF (CRBL LN) tracks a broadly diversified basket of commodities through the Thomson Reuters/CoreCommodity CRB Index. With around $1.1bn in AUM, the fund is the largest of its kind listed in Europe. It has a TER of 0.30%.

A riskier play on the commodity story could be one of the recently launched leveraged ETPs from Lyxor’s parent company Societe Generale, such as the WTI X2 Daily Long (SG30 LN) or SG WTI X5 Daily Long (SG28 LN), which offer leveraged exposures to the daily price movements of WTI oil.

However, whilst leveraged products provide an efficient means for sophisticated traders to obtain tactical exposures, they tend to decay in value if held for an extended period of time, potentially leading to significant losses especially in volatile but range-bound markets.

Investors seeking tactical shifts to their equity exposure as a potential inflation play could look into ETFs which track the MSCI World Energy Index. The index is composed of developed market companies—over half of which are US-based—which earn revenue from the energy sector.

The Lyxor MSCI World Energy TR UCITS ETF (NRGW LN) and Xtrackers MSCI World Energy Index UCITS ETF (XDW0 LN) may fit the bill here. The funds have returned 10.0% and 9.3% over April respectively in what has been an exceptional month for energy stocks.

NGRW has a TER of 0.30% and currently has AUM of around $170m. XDW0 has the same TER, but is the larger of the two funds with roughly $350m in AUM.

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