Yahoo Finance: ETFs targeting natural resources to counter inflation
For this week’s “ETF Report” on Yahoo Finance, with host Alexis Christoforous, ETF Trends CIO and research director Dave Nadig, were on hand to review what’s happening with the billions dollars flowing into ETFs targeting natural resources. As he explains, there’s a good reason it’s become so popular with investors, and it has to do with inflation issues.
“I think a lot of people are, at least, concerned about inflation,” Nadig said. “One of the ways people are expressing this concern is to address commodities. But commodities have all kinds of problems.”
For many investors, this is a new asset class that they are not particularly comfortable with. So, in addition to when commodities rally, resource companies are also upping the ante. This is what is happening now. Many investors put money into equity markets but target inflation sensitivity through commodities, and it has worked.
“Historically, infrastructure spending does not find its way to stock markets particularly quickly,” @ETFtrends‘ @DaveNadig said. “I think we’ll have an infrastructure bill, … but I’m not sure that’s the easiest thing to play as a public equity investor.” pic.twitter.com/5ppgXEy9hK
—YahooFinance (@YahooFinance) March 16, 2021
Nadig continues, “Natural resource stocks are up a lot more on an annual basis and on a yearly basis relative to broad equity indices because investors are really looking for this new approach.”
As for the downsides of pooling money in natural resource ETFs as an inflation hedge, Nadig notes that this is still an equity investment. As for the most popular fund, the Flexshares Morning Star Global Natural Resources ETF (GUNR), which holds a global basket of producers that is part of the stock market. So if there is a giant pullback in this market, they will not be immune.
However, what investors are counting on is that the cash flows of these companies over the next 1-5 years will be out of proportion to how they are currently priced in.
Nadig explains, “The downside here is that you get equity exposure whether you like it or not. The upside is that you’re tying that equity exposure to something that’s more inflation-sensitive.”
The statement of continuing interests
Given the quality of interest rates for ETFs at the end of last year, it is not surprising to see that this has continued. “Gangbusters” is the word of choice for Nadig, who notes how this year is poised to deliver an all-time high, and if flows continued at the rate they are now, ETFs would be on course for something close. a trillion dollars in net inflows.
With that in mind, Nadig has a more modest projection of around $650-700 million in net flows. However, it would still be the biggest year on record.
As for where investors are looking, inflation games are certainly history. There are significant increases in some of the commodities funds, Invesco PDBC was very popular. Other inflationary-type assets have also attracted interest, be it gold or investors looking for rate plays such as senior and bank loans – anything that will provide an advantage.
Looking at recent statements by Jerome Powell, Chairman of the Federal Reserve, who said inflation will be temporary, the market seems to be feeling differently. Nadig may agree that inflation is transitory up to a point.
“We have those baseline effects behind us,” says Nadig. “The next two CPI prints that we will see will be significant. It is not inconceivable that over the next quarter or two we will see a print above 3 on an annualized basis. That doesn’t mean it’s the new normal.”
He continues, “I think once we get past those base effects and move further down the slide, we’re going to find that the economy has reabsorbed that momentum, and we’re probably down about 2% again. .”
Much will depend on whether or not the Fed can sustain a scenario that resembles an inflationary environment. This will lead to a lot of political pressure to do something (raise interest rates) when inflation starts to hit.
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