With inflation rising and showing no signs of relenting over the near term, it’s not surprising that hard assets are soaring.
Among exchange traded funds, the SPDR Metals & Mining ETF (NYSEArca: XME) is one of the obvious beneficiaries, as highlighted by a year-to-date gain of more than 37%. Owing to persistent inflation, XME could offer more upside.
“The prospects for higher inflation and commodity prices may also continue to provide positive sentiment for natural resource firms. For instance, since 2002 when 12-month average CPI inflation was in the top quintiles (above 3%), natural resources equities outperformed broad equities by 7.5% on average over a 12-month period,” notes Matthew Bartolini, head of SPDR Americas Research.
As its name implies, the $3.56 billion XME is a mining fund, and that gives it sturdy sustainability credentials. Whether it’s lithium-ion batteries, energy storage systems, solar panels, or wind turbines, clean technologies are materials-intensive.
XME, which tracks the S&P® Metals and Mining Select Industry® Index, is tethered to that theme, indicating that not all of its impressive 2022 showing is the result of inflation.
XME’s 32 holdings include producers of aluminum, copper, and lithium, among other materials that are integral to the renewable energy transition. As one example, electric vehicles are significantly more metals-intensive than gas-powered automobiles, which helps to paint the picture of favorable long-term demand trends for XME member firms.
Even with its considerable leverage to renewable energy, which many investors may not be aware of as of yet, XME remains one of the more compelling equity-based ETFs for investors looking for an inflation-fighting addition to their portfolios.
“Natural resource equities, over the past five years, also have a 70% correlation with movements in US 5-year breakeven rates, underscoring the strength of the relationship between commodity-related equities and inflation expectations,” concludes Bartolini. “While natural resource equities are now up 30% on the year, realized volatility for the sector has increased. Because the market segment is uniquely tied to current macro events, this will likely continue. After all, any of this sector’s positive sentiment is not immune to today’s higher risk paradigm.”
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.