As of the end of October, the Consumer Price Index (CPI) surged a staggering 6.2% on a year-over-year basis. More recently, Federal Reserve Chairman Jerome Powell said that “transitory” should be out of the inflation lexicon.
When inflation jumps, as is the case this year, investors often favor assets known for being durable when the CPI rises, such as Treasury Inflation-Protected Securities (TIPS). Favoring TIPS is a scenario playing out this year.
“Starting in July 2020, investor sentiment changed, and money poured into inflation-protected bond funds. The category has received record inflows over the past year. Funds in the commodities broad basket category have not seen a large increase in flows during the three-year period, but investor interest has picked up in recent months,” notes Morningstar analyst Benjamin Slupecki.
While TIPS are predictable destinations when inflation runs hot, there are reasons to believe that assets such as the ALPS Sector Dividend Dogs ETF (SDOG) could be a better-than-adequate substitute for traditional inflation-fighting assets.
“In the first half of this period, from the start of 2019 through June 2020, funds in the commodities-focused category received the bulk of the inflows. This category includes funds that specialize in one commodity, such as agriculture, precious metals, energy, and industrial metals,” adds Slupecki.
In relation to SDOG, those trends are relevant because the ALPS fund employs an equal-weight sector strategy, meaning that it’s overweight to the energy and materials sectors — two groups that can deliver for investors against inflationary backdrops.
Another factor in SDOG’s favor as inflation proves more persistent than originally expected is the fact that dividend growth historically outpaces rising consumer prices. Although SDOG is designed as a high-dividend strategy, some of the fund’s components are among the companies contributing to S&P 500 payouts nearing records.
On that note, some market observers expect that broad market benchmarks could be in for a year of subdued returns in 2022 and that dividends will be a major source of equity upside for investors in the new year.
For now, SDOG yields a tidy 3.21% and is up 15% year-to-date compared with a gain of just 1.62% for the largest TIPS ETF.
For more news, information, and strategy, visit the ETF Building Blocks Channel.
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.