ETF Opportunities in an Inflationary Environment | ETF Trends

Investors can turn to exchange traded fund strategies designed to help diversify their portfolios in times of heightened inflationary pressures.

In the recent webcast, For Inflation-Fighting in a Volatile Market, Follow the U.S. Consumer, James Jessup, income strategist at Virtus ETFs; John Bartlett, president, portfolio manager, and research analyst at Reaves Asset Management; Zachary Szyndlar, director, portfolio manager, and credit analyst, securitized products at Newfleet Asset Management; and Andrew Szabo, portfolio manager, agency and residential mortgage-backed securities at Newfleet Asset Management, highlighted the persistent inflation and energy market volatility with consumer confidence and buying power faltering. Nevertheless, the strategists argued that there are still pockets of opportunities, including in utilities, asset-backed securities, and even bonds.

For example, the broad Virtus Newfleet Multi-Sector Unconstrained Bond ETF (NYSEArca: NFLT) helps target the right areas of the global bond market at the opportune times, implementing active sector rotation and disciplined risk management to achieve long-term excess returns. The unconstrained investment style does not require a manager to adhere to a specific benchmark. Instead, unconstrained strategies allow a manager to focus on returns across many asset classes and sectors, and the styles typically have a more long-term horizon. Moreover, a portfolio manager may use derivatives and other alternative asset classes to hedge market exposure.

NFLT focuses on a high-conviction portfolio. The active managers take on an opportunistic, diversified bond portfolio that pursues the greatest risk/reward potential across bond markets. Its flexible fixed income exposure is unconstrained across sectors with no target duration. Additionally, the top-down analysis weighs the relative attractiveness of bond sectors, evaluating fundamentals, yields, spreads, and supply/demand dynamics.

“As the markets digest global developments, we continue to believe active sector and issuer selection is critical to take advantage of market volatility as it arises. Our approach to fixed income — the approach we have implemented for over three decades — enables us to scan the bond market for the most attractive investment opportunities and is ideally suited for the current environment,” according to Virtus ETFs.

The Virtus Newfleet ABS/MBS ETF (NYSE: VABS) can complement a traditional fixed income portfolio. The ABS (auto loans, equipment leases, credit card receivables, student loans, etc.) and MBS (pools of mortgages, both residential and commercial, agency and non-agency) sectors provide a wider investment opportunity set and much-needed diversification relative to traditional fixed income. With an emphasis on the out-of-index, niche areas of the securitized credit markets, Newfleet’s securitized credit specialists employ their hallmark relative value approach, exploiting inefficiencies by continuously evaluating the market, sectors, and securities.

VABS focuses on a lower duration with attractive yield opportunities. Targeting a duration of between one to three years, the ETF strategy’s duration is significantly shorter than traditional core bond strategies while focusing on investment-grade securitized credit, which has historically offered a yield advantage over similarly rated traditional corporate bonds.

“Overall, investing in securitized assets is a diversification play away from corporates with direct exposure to the U.S. consumer who accounts for 70% of all economic activity. The U.S. consumer remains strong, as evidenced by record-low consumer debt service ratios and a strong housing market,” according to Virtus ETFs.

Lastly, the Virtus Reaves Utilities ETF (UTES) seeks to provide total return through a combination of capital appreciation and income. The ETF aims to deliver stronger risk-adjusted performance from energy exposure than pure passive plays. The strategy is backed by sector expertise that implements experienced insights into utility and energy investments through a disciplined, long-term strategy focused on companies and industries the subadviser knows well

The active management team focuses on qualitative (management interviews, field research, macro factor analysis) and quantitative (modeling, valuation, technicals) analysis to inform bottom-up security selection through a dynamic investment process emphasizing disciplined risk management.

“Energy and other commodity companies rightfully garner most of the attention as inflation hedges,” according to Virtus ETFs.

“Another important reason why utilities can perform during periods of high inflation is dividend income. Many utilities grow the distribution at the same pace of earnings growth, which today averages 5% to 6%. Investors today, particularly those with fixed income exposure, seem to accept the higher volatility that comes with an equity investment to own an income stream that can keep up with inflation.”

Financial advisors who are interested in learning more about inflation hedging strategies can watch the webcast here on demand.