As 2022 winds down, volatility could still roil the capital markets in 2023. Per a Business Insider article, Morgan Stanley is expecting “extreme volatility” in the new year after what’s already been a volatile 2022.
The rising tide of consumer prices has market experts looking back at years past when inflation was also rampant. This includes the 1940s and 1970s.
“We don’t think it’s the 70s, we think it’s more of the 40s, where it’s a boom-bust,” Morgan Stanley chief investment officer Mike Wilson told CNBC. He compared the current inflation cycle to the demand-driven inflation that took root in the economy after World War II.
As the Business Insider article explained, “the 40s, supply and demand eventually balanced out – but inflation remained sticky, which could be a clue to what lies ahead for the economy next year, Wilson said.”
If this projection holds, it appears that inflation won’t be subsiding anytime soon. As such, investors may want to continue adding inflation and volatility hedges.
“Already, that trend is starting to show, and despite softening demand and improving supply issues, inflation is still well above the Fed’s 2% target, with prices barely cooling to 7.7% in October.”
“Inflation can’t ebb as quickly as it flows when demand falls by the wayside and supply picks up. And that’s exactly what we see in 2023,” Wilson said.
An ETF With a Built-In Hedging Component
While there are various ways that investors can hedge effectively against interest rates, there’s an easier way than holding several positions and/or combining various strategies. One exchange traded fund (ETF) essentially does it all by having a built-in hedging component: the Global X Interest Rate Volatility & Inflation Hedge ETF (IRVH).
IRVH seeks to hedge relative interest rate movements arising from a steepening of the U.S. interest rate curve and to benefit from periods of market stress when interest rate volatility increases, while also providing inflation-protected income. It combines over-the-counter options on the interest rate markets with U.S. Treasury inflation-protected securities (TIPS) to hedge inflation and interest rate risk.
Highlights of IRVH:
- Efficient hedge: By pairing TIPS with over-the-counter (OTC) interest rate options, IRVH offers investors the ability to potentially hedge against inflation and benefit from falling short-term interest rates and/or rising long-term interest rates.
- Portfolio diversifier: IRVH is expected to exhibit low correlation with equity, real estate, and fixed income markets, making it a potential diversifier within a broader portfolio.
- Monthly distributions: IRVH expects to make monthly distributions with the potential for inflation-protected income.
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