ETFs To Win As Inflation Jumps To New 40-Year High

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After cooling somewhat in April, U.S. consumer prices have accelerated at the fastest rate in May since 1981, as Americans grapple with a surge in the cost of gas, food, and shelter. The consumer price index (CPI) jumped 8.6% year over year to a fresh 40-year high, from an 8.3% annual increase recorded in April.

Investors could make some profits by investing in ETFs benefitting from higher prices. These ETFs — United States Gasoline ETF (UGA - Free Report), iShares MSCI Global Agriculture Producers ETF (VEGI - Free Report), Defiance Hotel, Airline, and Cruise ETF (CRUZ - Free Report), and First Trust S-Network Future Vehicles & Technology ETF (CARZ - Free Report) — could be compelling choices for investors amid growing inflation.


Behind the Inflation Numbers

Record gasoline prices and geopolitical factors are the two major culprits pushing inflation higher. The data has put pressure on Fed to extend an aggressive series of interest rate hikes and has added to political problems for the White House and Democrats.

Energy prices jumped 34.6% — the most since 2005 — with gasoline jumping nearly 49%. Grocery prices rose 11.9% annually — the most since 1979 — while electricity increased 12%, the highest since August 2006. Russia’s ongoing war in Ukraine and the resultant higher sanctions, potential port disruption due to the upcoming West Coast dockworker contract expiration, COVID-related lockdowns in China, and drought will continue to weigh on food and energy prices.

Prices for the other categories also skyrocketed. Airfare rose about 38% while transportation and hotel rooms saw an increase of nearly 19% each. Prices for used and new vehicles rose 16% and 13%, respectively.

The so-called core inflation, which strips out volatile components such as food and energy prices, rose 6% month over month, more than the expectation of 5.9%.

ETFs in Focus

United States Gasoline ETF

United States Gasoline ETF is designed to track in percentage terms the movements of gasoline prices. The benchmark futures contract is the futures contract on gasoline as traded on the NYMEX. If the near-month contract is within two weeks of expiration, the benchmark will be the next month's contract to expire. United States Gasoline ETF is illiquid with a daily trading volume of about 82,000, suggesting that investors have to pay extra beyond the annual fee of 0.90% per year. The fund has managed assets of $188.5 million.

As traders need to roll from one future contract to another, the fund is susceptible to roll yield. Notably, roll yield is positive when the futures market is in backwardation and negative when the futures market is in contango. Basically, if the price of the near-month contract is higher than the next month's futures contract, then it is backwardation and the opposite holds true in contango.

iShares MSCI Global Agriculture Producers ETF 

iShares MSCI Global Agriculture Producers ETF provides global exposure to companies that produce fertilizers and agricultural chemicals, farm machinery, packaged foods, and meats by tracking the MSCI ACWI Select Agriculture Producers Investable Market Index. It holds 156 stocks in its basket, with a heavy concentration on the top firm. American firms account for 55.7% of the assets, while Canada, Norway, and Japan round off the next three spots.

iShares MSCI Global Agriculture Producers ETF has $317.9 million in AUM and trades around 177,000 shares in an average daily volume. It charges 39 bps in fees per year from investors.

Defiance Hotel, Airline, and Cruise ETF 

Defiance Hotel, Airline, and Cruise ETF track the BlueStar Global Hotels, Airlines, and Cruises Index, which measures the performance of globally listed companies primarily engaged in the travel and tourism industries. Holding 55 stocks in its basket, American firms make up 72.3% of the portfolio, while Britain, Japan, and Ireland round off the next three with single-digit exposure each.

Defiance Hotel, Airline, and Cruise ETF, launched in June 2021, has gathered around $49 million in its asset base and charges 45 bps in annual fees. Volume is lower as it exchanges around 66,000 shares a day on average. CRUZ has a Zacks ETF Rank #3 (Hold).

First Trust S-Network Future Vehicles & Technology ETF 

First Trust S-Network Future Vehicles & Technology ETF offers pure-play global exposure to companies operating in the electric and future vehicle ecosystem by tracking the S-Network Electric & Future Vehicle Ecosystem Index. It has a moderate concentration across components as each of these makes up for no more than a 5% share.

First Trust NASDAQ Global Auto ETF has $61.7 million in AUM and trades in a small average daily trading volume of about 7,000 shares. The product charges 70 bps in fees per year and has a Zacks ETF Rank #3 with a High-risk outlook.

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