According to the latest data, U.S. inflation is tame. In late September, the Commerce Department said consumer price inflation fell 0.1%. When excluding the volatile food and energy categories, prices only rose at a 0.6%, the weakest core reading since early 2009.
There are no guarantees that benign inflation in the world’s largest economy will be a permanent fixture and if inflation, some investors are likely to turn to energy stocks and ETFs as inflation hedges. They may be disappointed by the performance of ETFs like the Energy Select Sector SPDR (NYSEArca: XLE) and the Vanguard Energy ETF (NYSEArca: VDE) in high inflation environments. [Big Energy ETFs Show Vulnerability]
Attain Capital Management recently compared the performance of XLE, the largest energy ETF by assets, against the BarclayHedge CTA Index, an index of managed futures, during the January 2007 – June 2008 period. That was a high inflation period as crude futures spiked to $133 from $61 per barrel, as Attain Capital noted.
Attain compared the managed futures index against XLE”by multiplying the monthly profits and losses of the BarclayHedge CTA Index by 3.25,” noting that in January 2007-June 2008 time frame, the managed futures strategy outperformed the ETF by over 1,600 basis points with a drawdown of 9.76% compared to almost 12.3% for XLE. The firm went on to note that since XLE debuted in 1999, it has slightly lagged the CTA Index with a drawdown more than twice that of the managed futures play.
XLE showed a correlation of 0.63 to the S&P 500 over that time compared to -0.15 for the CTA Index, according to data provided by Attain.