Exchange traded fund investors are throwing money into strategies that help hedge against a rising inflationary market environment.
For example, ETF investors poured a combined $1.1 billion into the iShares US Real Estate ETF (IYR) and iShares TIPS Bond ETF (TIP) on Wednesday, according to Bloomberg. Meanwhile, ETF investors yanked $900 million out of the iShares 7-10 Year Treasury Bond ETF (IEF).
In case of rising inflation, traditional bond fund strategies like IEF would see real yields or yields after accounting for inflation decline. Meanwhile, ETF strategies like IYR and TIP can help fixed-income investors hedge against rising consumer prices.
The iShares TIPS Bond ETF provides exposure to U.S. Treasury Inflation-Protected Securities, which are government bonds whose face value rises with inflation.
The iShares US Real Estate ETF provides exposure to U.S. real estate companies and real estate investment trusts, which invest in real estate directly and trade like stocks. The property prices and rental income from these real estate assets typically rise when inflation rises. Additionally, REITs consist of a basket of real estate properties that pays out dividends to investors.
Cross assets strategist Charlie McElligott at Nomura Securities argued that Wednesday’s flows suggested investors are putting money behind the reflation trade, again. Additionally, McElligott pointed out that as U.S. 10-year Treasury yields have been “stuck” below 1.4% since July, ETF traders could now anticipate higher rates and look for inflation protection in hopes that the reflation trade rebounds.
“Notionally, these aforementioned ETF flows are not the end-all, be-all of course,” McElligott said. “However, the reallocation above is simply more evidence of this ‘openness’ I have been referencing from investors to take another shot on bearish fixed-income/bullish reflation into the back part of the year.”
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