As inflation rears its ugly head, investors could look to energy and materials exchange traded funds that benefit from higher commodity prices.
The energy and materials sectors are leading the S&P 500’s 11 sectors in May, increasing 8% and 5.9%, respectively, compared to the broad U.S. benchmark’s 0.2% dip, the Wall Street Journal reports.
Energy and materials stocks are among the cyclical plays that typically strengthen as the economy picks up speed. Economists now project growth to gain momentum in the current quarter, which should fuel demand for energy and materials.
“As people start to travel again, that directly impacts the demand for oil and gas,” Jennifer Foster, co-chief investment officer for equities at Chilton Trust, told the WSJ. “And then as folks are interested in spending more and there’s a bid for automobiles, for instance, that’s leading to shortages along the supply chain.”
The energy and materials sectors could also be in a better position in an environment of rising prices.
“If oil prices are going to rise, you want a company that sells oil, not one that buys oil,” Steve Chiavarone, portfolio manager at Federated Hermes, told the WSJ. “If various commodity prices rise, you want to own materials companies that are selling that commodity rather than companies that are buying that.”
Brent crude jumped 33% this year, and the International Energy Agency said that the oil supply glut that had built up during the pandemic has nearly normalized. Copper prices also recently climbed to record highs for the first time in over a decade on bets of a global economic rebound.
“You’ve got fever-pitch pricing in copper and iron ore, and you’ve got very strong recovery in oil,” Jeffrey Germain, director of investments at Brandes Investment Partners, told the WSJ.
As a way to track these two segments, investors can look to materials options like the Materials Select Sector SPDR (NYSEArca: XLB), iShares U.S. Basic Materials ETF (NYSEArca: IYM), Vanguard Materials ETF (NYSEArca: VAW), and Fidelity MSCI Materials Index ETF (NYSEArca: FMAT).
Additionally, for energy sector exposure, investors can turn to the Energy Select Sector SPDR (NYSEArca: XLE), Vanguard Energy ETF (NYSEArca: VDE), iShares U.S. Energy ETF (NYSEArca: IYE), and Fidelity MSCI Energy Index ETF (NYSEArca: FENY).
For more information on the various market sectors, visit our sector ETFs category.