While inflation has been a primary theme mentioned on earnings calls over the course of 2021, many U.S. corporations can deal with rising prices thanks to some pricing power.
That’s the view of Fitch Ratings, and should it prove accurate, it could be beneficial to some corporate bond exchange traded funds, including the WisdomTree U.S. Corporate Bond Fund (CBOE: WFIG).
“Most issuers have some ability to pass rising costs on to customers via pricing and, to a lesser extent, reducing costs with greater operating efficiency, says Fitch Ratings. Issuers in certain sectors also have a strong track record of protecting margins,” according to the research firm.
WFIG, which sports a 30-day SEC yield of 2.19%, follows the WisdomTree U.S. Corporate Bond Index. While that benchmark isn’t explicitly designed to be an inflation fighter, its emphasis on issues with favorable fundamental and income characteristics makes it a worthy consideration at a time when many experts are concerned about the impact that rising consumer prices are having on bonds.
WFIG’s methodology is relevant today because some professional investors believe that intensifying inflation could weigh on some issuers’ credit profiles.
“Institutional investors participating in Fitch’s 2021 Investor Advisory Council (IAC) expect inflation to pose the greatest challenge to issuer credit profiles over the near-to-intermediate term,” adds Fitch.
Nearly 92% of WFIG’s components are rated A or BBB. Additionally, the WisdomTree ETF has some compelling sector exposures for these inflationary times.
“The ability of some high exposure sectors to mitigate the effects on margins should be good. Autos, homebuilders, utilities and gaming have a strong track record of protecting margin and benefit from a consolidated industry structure and/or inelastic demand,” notes Fitch. “However, declining affordability could affect ongoing pricing power for homebuilders. Restaurants have a high ability to pass along costs due, in part, to high personal savings rates during the lockdown, pent-up demand and rising food-at-home prices.”
Utilities issues account for nearly 9% of WFIG’s roster while several of the groups mentioned above command smaller weights in the ETF. WFIG’s healthcare allocation at 14% — its second-largest weight — is also relevant because that group only has medium exposure to wage inflation and input prices and low exposure to energy costs and transportation and logistics costs, according to Fitch.
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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.
