Inflation Steers Sector Rotation | ETF Trends

As goes January, so goes the year, or so the old adage on Wall Street suggests.

The first trading week of 2022 closed with stocks in the red: the Nasdaq fell nearly 1%, and the S&P 500 and Dow Jones closed flat.

Worries surrounding the U.S. labor market recovery, inflation, and the negative impact on equities are dominating sector rotations as allocators continue to align their portfolios to capitalize on the shifting climate.

“This year, the top areas are going to be those things that are directly related to inflation,” Michael Ashton, managing principal at Enduring Investments, said. “A well structured commodity product should be in everybody’s portfolio.”

Historically, cyclically oriented sectors such as energy, materials, industrials, and financials have shown higher sensitivity to rising inflation.

“Being able to invest in something which is positively correlated to inflation is crucial, and it’s something we have not needed [in 40 to 50 years] but we really need it now,” Ashton said. “If you can get good products in that vein, they’ll be here to stay, and they should become a pretty decent size of the average investor’s portfolio.”

John Davi, CEO and CIO at Astoria Portfolio Advisors, said that the firm has concentrated its inflation bets and is then hedging that with defensive strategies like dividends, min vol, utilities, and healthcare. 

Davi said that what he thinks advisors should be doing from a portfolio construction standpoint is shying away from growth while continuing to buy value, banks, and energy, as well as increasingly using utilities, healthcare, and other defensive equities to hedge the beta in a portfolio.

“Most of the good inflation solutions involve commodities at some level,” Ashton said, suggesting replacing broad equity indexes with broad commodity indexes to displace equity risk.

“You should get a decent broad index that is reasonably smart about where it gets its exposure and how it carries, and there are a couple out there that do that,” Ashton added.

The Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC) and the United States Commodity Index Fund (USCI) are examples of smart broad index ETFs that are appropriate for this climate, according to Ashton.

Astoria’s top ETF picks for inflation include the AXS Astoria Inflation Sensitive ETF (PPI), the abrdn Bloomberg All Commodity Strategy K-1 Free ETF (BCI), and the Invesco KBW Bank ETF (KBWB).

For more news, information, and strategy, visit the ETF Education Channel.