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ETFs to Win/Lose Amid Rising Inflationary Bets

Vaccine distribution and a likely fat federal spending bill under the Biden administration have led to a rise in future economic growth forecasts, which in turn boosted bets over rising inflation and resulted in the rise in treasury yields. The Fed’s ongoing super-dovish monetary policy has also stoked inflation concerns.

The yield on the 10-year U.S. treasury note was as high as 1.394% on Feb 22, the highest since February 2020. This is slightly higher than the S&P 500’s dividend yield of about 1.46%, according to Refinitiv’s Datastream, quoted on Reuters. Notably, the S&P 500’s yield has gradually as the index has been around a record-high level of late.

Against this backdrop, we highlight a few winning and losing ETFs that could be in focus right now.

Winners

Schwab U.S. TIPS ETF (SCHP) – Up 0.1% on Feb 22

TIPS ETFs offer robust real returns during inflationary periods unlike their unprotected peers in the fixed-income world. These securities pay an interest on an inflated-principal amount (principal rises with inflation) and when the securities mature, investors get either the inflation-adjusted principal or the original principal, whichever is greater. As a result, both principal amount and interest payments will keep increasing with rising consumer prices.

The underlying Bloomberg Barclays US Treasury Inflation-Linked Bond Index (Series-L) includes all publicly-issued U.S. Treasury Inflation-Protected Securities that have at least a year remaining to maturity, are rated investment grade and have $500 million or more of outstanding face value. The fund charges 5 bps in fees.

Invesco DB Commodity Index Tracking Fund (DBC) – Up 2.24% on Feb 22

Inflationary bets boosted commodities.Commodities jumped to their highest level in almost eight years as prices are rising from oil to agricultural products. The fund DBC has exposure to oil, gold, copper, corn, sugar, soybeans, wheat, aluminium, zinc and silver. No wonder, DBC was up more than 2% on Feb 22 and also added 1.1% after hours.

SPDR Gold Shares GLD – Up 1.5% on Feb 22

Gold acts as a hedge against inflation.So, expectations for rising inflation stoked equity valuation concerns and drove investors toward the safe-haven metal. A weaker U.S. dollar also helped gold gain in price. The fund GLD added 0.1% after hours.

Vanguard High Dividend Yield Index Fund ETF Shares (VYM) – Up 0.4% on Feb 22

The fund follows the FTSE High Dividend Yield Index which consists of common stocks of companies that pay dividends that generally are higher than average. It yields 3.02% annually. Such hefty yields may drive some income-loving investors to this high-dividend equity fund. After all, value funds like VYM is also ripe for capital appreciation amid a rising rate environment.

Dividend payments among companies have also resumed, with many even hiking their payouts. After total S&P 500 dividend payments dipped less than 1% last year to $483 billion, total dividends in 2021 are set to rise by about 5%, per S&P Dow Jones Indices senior index analyst Howard Silverblatt, as quoted on Reuters.

Losers

iShares 20+ Year Treasury Bond ETF TLT – Down 0.8% on Feb 22

As yields rise, bond prices fall. Short interest, as a percentage of shares outstanding on the $14 billion TLT, is at a three-year high, IHS Markit Ltd. data revealed, as quoted on Bloomberg.

Schwab U.S. Large-Cap Growth ETF SCHG – Down 2.3% on Feb 22

Growth stocks outperformed last year on extreme low interests. Now a runup in bond yields has hurt the segment’s sky-high valuation. Notably, SCHG lost 0.5% after hours on Feb 22.

Invesco DB US Dollar Index Bullish Fund UUP – Down 0.3% on Feb 22

If there is a continued rise in the U.S. inflation, the greenback may lose value. Moreover, inflation is likely to drive input costs for exports, which in turn makes a nation's exports less competitive. This will widen the trade deficit and cause the currency to fall further.

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iShares 20 Year Treasury Bond ETF (TLT): ETF Research Reports
 
SPDR Gold Shares (GLD): ETF Research Reports
 
Invesco DB Commodity Index Tracking ETF (DBC): ETF Research Reports
 
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Zacks Investment Research
 
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