Inflation Reaches 40-Year High: 4 Sector ETFs To Buy

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Inflation has been red-hot with no signs of slowing down. This is especially true as the consumer price index (“CPI”) jumped 7.5% year over year in January, marking the largest 12-month gain since February 1982. The high inflation has set the stage for the first interest rate hike as soon as in March.

Investors could make some profits by investing in ETFs benefiting from the rising inflation. These ETFs — Materials Select Sector SPDR (XLB - Free Report), iShares U.S. Home Construction ETF (ITB - Free Report), SPDR S&P Regional Banking ETF (KRE - Free Report), and Vanguard Energy ETF (VDE - Free Report) — with exposure to different sectors could be compelling choices for investors amid growing inflation. These ETFs have a Zacks ETF Rank #1 (Strong Buy) or 2 (Buy), suggesting their continued outperformance.

Behind the Inflation Numbers

The pandemic-related supply chain disruptions and steady strength in consumer demand continued to push prices higher. The so-called core inflation, which strips out volatile components such as food and energy prices, rose 6% year over year, marking the biggest growth since August 1982.

Energy prices remained a key contributor to the inflation numbers, with a 27% year-over-year increase. Dining at home and out became more expensive as food at home prices rose 1% during the month, while food away from home prices rose 0.7%.

The trend is likely to continue in the coming months given the surging demand and limited supply. There have been shortages on the supply side of the U.S. economy given the lack of commodities, labor shortages, and other inputs to produce the totality of all the goods and services demanded by other businesses and American consumers. Additionally, consumer demand is increasing as the economy is recovering from the pandemic.

Following the latest inflation data, the chances of a 0.5 percentage point Fed rate hike in March rose to 44.3% compared with 25% just before, according to CME data. Chances of a sixth quarter-percentage-point hike this year rose to about 63%, compared with about 53% before the release. Wall Street analysts are predicting as many as seven rate hikes this year. Goldman Sachs sees five rate hikes, versus four previously, with the first increase in March while Bank of America projects seven rate hikes this year.

ETFs in Focus

Materials Select Sector SPDR (XLB)

As prices of various materials have been on the rise, the material sector has been witnessing solid growth. Materials Select Sector SPDR is the most popular material ETF that follows the Materials Select Sector Index. It manages about $7.4 billion in its asset base and trades in volumes as heavy as around 7.5 million shares. Materials Select Sector SPDR holds about 28 securities in its basket and charges 10 bps in fees per year from its investors.

In terms of industrial exposure, chemicals dominates the portfolio with a 67.7% share, while metals & mining, and containers & packaging round off the top three positions. The product has a Zacks ETF Rank #1 with a Medium risk outlook.

iShares U.S. Home Construction ETF (ITB)

The thirst for home buying is rising even in the face of increasing housing prices and mortgage rates, thus providing huge profits to homebuilders. This is primarily thanks to skyrocketing demand and limited supplies. iShares U.S. Home Construction ETF provides exposure to U.S. companies that manufacture residential homes by tracking the Dow Jones U.S. Select Home Construction Index.

With AUM of $2.4 billion, iShares U.S. Home Construction ETF holds a basket of 46 stocks with heavy concentration on the top two firms. The product charges 41 bps in annual fees and trades in a heavy volume of around 4 million shares a day on average. iShares U.S. Home Construction ETF has a Zacks ETF Rank #2 with a High risk outlook.

SPDR S&P Regional Banking ETF (KRE)

The financial sector is one of the biggest beneficiaries of rising inflation and potentially rising interest rates. This is because rising rates mean high yields on loan and fixed-income portfolios, which increase revenue margins for the financial institutions with those portfolios. While there are many options available in the sector, SPDR S&P Regional Banking ETF, which targets the banking corner, appears as a more exciting pick.

SPDR S&P Regional Banking ETF follows the S&P Regional Banks Select Industry Index, charging investors 35 basis points a year in fees. It is one of the largest and most-popular ETFs in the banking space with AUM of $6 billion and an average daily volume of 10.8 million shares. Holding 138 securities in its basket, SPDR S&P Regional Banking ETF carries a Zacks ETF Rank #2 with a High risk outlook.

Vanguard Energy ETF (VDE)

Energy stocks should perform well in high-inflation environments. Vanguard Energy ETF is one of the popular choices in the energy space, having accumulated $7.3 billion in its asset base. It provides exposure to a basket of 103 energy stocks by tracking the MSCI US Investable Market Energy 25/50 Index.

Vanguard Energy ETF sees a good volume of about 1.8 million shares and charges 10 bps in annual fees. VDE has a Zacks ETF Rank #2 with a High risk outlook.

Disclosure: contains statements and statistics that have been obtained from sources believed to be reliable but are not guaranteed as to accuracy or completeness. References to any ...

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