Inflation continues to rise, and as advisors work to reposition portfolios for the new market environment, Amplify ETFs offers some insight and suggestions on opportunities in a recent webcast moderated by Lara Crigger, managing editor of ETF Trends and ETF Database. Topics covered include what investments benefit during inflation, two stock characteristics that are currently attractive options for core equity portfolios, finding above average income in rising rate environments, and the benefits of active management during volatility.
Christian Magoon, founder and COO of Amplify ETFs, explains that for many advisors, this is the first time they are having to apply inflation hedges to portfolios, since the last major inflationary period was in the 1970s. 2021 marked the 12th year of a bull run for the economy, but that run has experienced drawdowns, sometimes as great as 20% or more.
Risks that markets face now and looking ahead include geopolitical risks, COVID-19 variants, rising interest rates, and inflation. Geopolitical events historically have caused a shock to the S&P 500 that was negative in the short term, but then saw the S&P gaining over a year timespan.
“Certainly Russia isn’t good in the short term for markets, and there could be more to come here, but we note that over time a lot of these kind of shock events tend to get worked out by the markets, and indeed the S&P has been able to respond in a positive manner,” Magoon says. “I think it’s a perspective worth having in the midst of this Russian-led storm.”
Magoon also touches on estimated schedules for COVID-19 variants and gradual economic impact reductions that have happened with each new variant, before moving on to discuss rising rate impacts to stocks and the surprising positive performance by the S&P 500 during rising rate times.
Michael Venuto, co-founder and CIO of Toroso Investments, goes into detail discussing inflation, the rising commodity prices, and the variety of diversification that commodities investing can offer. Venuto is careful to point out the importance of investing in a variety of commodities because they all behave differently in the short term and are volatile.
2 Investing Strategies for an Inflationary Environment
More than half of the advisors on the call reported that they were utilizing dividend-paying stocks to meet the income needs of their clients. Kevin Simpson, founder and CIO of Capital Wealth Planning, LLC, talks about the current market environment and the importance of investing in companies actively growing their dividends for retirement portfolios.
“You mentioned the recession problem, and it’s a real problem. We might be able to skirt around stagflation because we have low interest rates. Stagflation is a weird thing, it’s a compressing economy with rising rates; we’ll have those two variables, but we still have low employment,” Simpson says. “One thing I will say is if we do go into a recession, which I think is a higher probability than most strategists, I think it will be shorter-lived than previous recessions.”
The Amplify CWP Enhanced Dividend Income ETF (DIVO) seeks to invest in dividend growth mega-cap companies and uses a covered call component that offers some downside protection as well as the opportunity for additional income for the fund.
Venuto pivots the talk to the Amplify Inflation Fighter ETF (IWIN) and explains that the definition of real inflation for investors today is a combination of currency debasement (such as the stimulus and increased printing of money) and increasing cost of goods that can be driven by a variety of factors like supply chain issues, geopolitical tensions, and others. Beneficiaries of real inflation include gold, bitcoin, and land as currency debasement fighters, and commodity REITs, real estate technology, and consumer commodities as fighters of increasing cost of goods.
“What we’ve done with IWIN, which is our inflation-fighting, actively managed ETF with Amplify, is we’ve combined the ability to use equities that should be inflation-fighters with commodities that should be inflation-fighters,” Venuto says.
The commodities portion of the portfolio can be up to 50% and contains both commodity futures and ETFs, while the equity portion contains more traditionally expected inflationary allocations such as asset miners and homebuilders. IWIN does not contain traditional REITs but does have commodity REITs such as farmlands.
Financial advisors who are interested in learning more about income opportunities in an inflation environment can watch the webcast here on demand.