Higher inflation expectations have recently made Wall Street jittery. As evidenced by the U.S. 10-year Treasury yield that stands at 1.65%, bond yields are rising.
As the COVID-19 vaccine rollout continues at pace, the U.S. economy has been opening up and showing healthy signs of recovery. Now, investors are looking for ways to position their portfolios for higher consumer spending, especially on energy costs, food prices as well as housing.
We recently covered inflation and the U.S. Treasury inflation-protected securities (TIPS) as an asset appropriate for a range of individuals. Today, we introduce two more exchange-traded funds (ETFs) for readers concerned that higher inflation levels could take a bite out of their savings.
1. Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF
Current Price: $16.95
52-Week Range: $11.14 - $18.18
Expense Ratio: 0.59% per year
The Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (NASDAQ:PDBC) invests in commodity-linked futures and other financial instruments that give exposure to a range of commodities. The fund started trading in November 2014. Its assets under management stand at $4.3 billion.
As an actively-traded ETF, PDBC aims to provide a long-term capital appreciation strategy that surpasses the returns of the DBIQ Optimum Yield Diversified Commodity Index Excess Return benchmark. This index comprises futures contracts on 14 commodities across the energy, precious metals, industrial metals and agriculture sectors.
The top 10 commodities are WTI crude, gasoline, NY Harbor ULSD, Brent crude, aluminum, gold, copper, corn, soybeans, sugar, zinc, wheat, natural gas and silver. Close to 30% of the fund is in these leading names.
So far in 2021, PDBC has returned more than 14%. It hit a 52-week high earlier in March. Commodity price changes mostly depend on supply-and-demand dynamics. For example, during a cold winter, as the demand for natural gas increases, so do prices. Commodity prices also usually move higher during inflationary periods, as they are widely considered a hedge against inflation.
Historically, there has been a negative correlation between commodities and stocks. Academic research shows that by investing in commodity futures, or ETFs based on these contracts, market participants could potentially decrease the volatility of an all-stock portfolio. Thus, investors who are interested in diversifying into commodities might consider researching the fund further.
The Real Estate Select Sector SPDR Fund
Current Price: $38.80
52-Week Range: $24.88 - $39.66
Dividend Yield: 3.97%
Expense Ratio: 0.13% per year
This ETF focuses on real estate investment trusts (REITs). According to metrics from the National Association of Real Estate Investment Trusts (NAREIT):
"REITs provide natural protection against inflation. Real estate rents and values tend to increase when prices do. This supports REIT dividend growth and provides a reliable stream of income even during inflationary periods. REIT dividends have outpaced inflation as measured by the Consumer Price Index in all but two of the last 20 years."
In earlier articles, we introduced several REIT funds (here, here and here). This sectoral ETF, The Real Estate Select Sector SPDR Fund (NYSE:XLRE), primarily provides exposure to REITs (97.92%) as well as real estate management and development companies (2.08%), while completely excluding mortgage REITs. Since its inception in October 2015, funds under management have grown to $2.4 billion.
XLRE, which tracks the returns of the Real Estate Select Sector index, currently has 29 holdings. Around 60% of the fund is held in the top 10 stocks.
Among the leading names are American Tower (NYSE:AMT), Prologis (NYSE:PLD), Crown Castle International (NYSE:CCI), Equinix (NASDAQ:EQIX) and Digital Realty Trust (NYSE:DLR).
Year-to-date, XLRE is up about 6% and hit a 52-week high in mid-March. The upcoming earnings season might lead to volatility and profit-taking in many of the names that make up the ETF. However, those investors who regard real assets as inflation hedges might regard declines in the fund's price as an opportunity to invest.