As economies enter the mid-cycle phase next year, investors face familiar question marks over inflation, monetary policy, and COVID-19, but without the tailwind of optimism early recovery.
While additional variants could complicate the public health situation, Bob Jenkins, head of Lipper research at Refinitiv, said any volatility would “almost algorithmically” create a predictable scramble for market leadership.
A much greater uncertainty is the inflationary picture, with input factors such as ever-strained supply chains and labor shortages and, further, discussions on rate cuts and hikes. .
Ahead of central bank meetings last week, Refintiv’s Jenkins predicted that U.S. inflation would ease to a range of 3.5% to 4.5% over the next year. Okay, the outlook through BlackRock’s ETF arm, iShares suggested that inflation would exceed the popular 2% target and trade up to 6%.
However, illustrating the dynamic nature of the monetary situation, 52% of those polled in a JP Morgan survey expected two Federal Reserve rate hikes in 2022, while the Federal Open Markets Committee (FOMC) decision of the last week to change its reduction schedule has led some to believe there could be up to three increases in a year. In addition, the Bank of England surprised the markets with its first rate hike in three years last Thursday.
Considering what could be a more difficult year for most asset classes, ETF flows selected five ETFs that could offer inflation protection and outperformance.
1. Xtrackers MSCI World Financials UCITS ETF (XDWF)
The $ 1.5 billion XDWF, which is the lowest cost and among the largest ETFs targeting the financial sector in any developed economy, starts our list.
With a Total Expense Ratio (TER) of 0.25%, XDWF tracks the MSCI World Financials Index which provides exposure to companies involved in banking, asset management and custody, money markets, stock exchanges, insurance and investment brokerage.
XDWF could serve as an ideal hedge against inflation, given that banks have lower input costs than many industries. Additionally, while rate hikes may have a negative impact on the volume of borrowing activity, the increased cost of capital for those who still take out business loans and mortgages will ultimately produce more results. strong for the financial sector.
Additionally, JP Morgan’s multi-asset outlook for 2022 revealed the company is overweight cyclicals and value stocks, with a preference for reflation-sensitive sectors such as energy and financials, consumer, health and small cap services.
2. L&G Multi-Strategy Enhanced Commodities UCITS ETF (ENCO)
Next is the $ 478 million ENCO which launched in July. While âreal assetsâ such as commodities and infrastructure are vanilla inflation hedges, ENCO’s cycle optimization methodology offers a unique way to rotate between different commodities.
With a fee of 0.30%, ENCO tracks the Barclays Backwardation Tilt Multi-Strategy Capped Total Return index to provide forward exposure to key commodity subgroups such as energy, precious metals, metals industrial, livestock and agriculture.
What sets the product apart from the less exotic commodity baskets offered by Legal & General Investment Management (LGIM) is its multi-factor methodology which initiates futures contracts at specific times during market cycles.
First, the underlying ENCO index is assigned to seasonal futures contracts on commodities such as heating oil, diesel and natural gas at high points in the production and demand cycle.
Then, it applies a rolling yield factor to invest in energy and industrial metals futures contracts at the most favorable positions with the most favorable implied rolling yield.
The combination of these factors means that at present, with winter demand and tight supply, the ETF is currently weighted 48.3% by energy commodities alone.
Finally, it takes into account the dynamics of agricultural and animal commodities – which have historically been affected by crop yields, weather conditions and reproductive cycles – by investing in futures contracts with the highest annual outperformance per year. compared to the neighboring futures contract.
Although relatively new to the market, ENCO’s approach has been popular with investors since its launch and its preference for dynamic change between commodities has allowed it to generate a 6.5% return over the past three years. months, according to ETF Logic data.
3. Tabula US Enhanced Inflation UCITS ETF (TINF)
The only fixed income exposure on our list and the winner of ETF of the Year at ETF Stream’s inaugural ETF Awards is the $ 112 million TINF.
With a TER of 0.29% and following the Bloomberg US Enhanced Inflation Index, TINF offers exposure to US Treasuries while capturing inflation expectations as net of the difference between long positions in Treasuries American Inflation Protected (TIPS) and short positions in US real yields. .
TINF is the first ETF in Europe to combine U.S. TIPS and 7-10 year breakeven inflation rates with a single exposure to U.S. Treasuries – a mix that creates a different result than the rest of the bond ETF space .
Looking ahead to 2022, JP Morgan and BlackRock predict a tough year for bond investors with continued underperformance against equities. Standing out, TINF has returned 13.3% so far this year, as of December 17, according to data from ETF Logic.
4. Lyxor MSCI EM Asia UCITS ETF (LCAL)
Our penultimate ETF is the cheapest and best performing trailing ETF of the past year, mirroring the MSCI Emerging Markets Asia Index, the LCAL of $ 250 million.
Charging a fee of just 0.12%, LCAL synthetically replicates its underlying benchmark of 1,611 stocks representing companies based in China, Taiwan, India, South Korea, Hong Kong, Thailand, Indonesia , Malaysia and the Philippines.
In their forward looking analyzes, PIMCO and JP Morgan identified an opportunity to outperform emerging Asia in the new year.
While PIMCO remained overweighted across exposure to Asian emerging markets, JP Morgan expressed support for China’s focus on deleveraging, decarbonization and reducing income inequality. He added better sentiment, stronger earnings growth and the convergence of historic relative valuation after a tough 2021 should create outperformance.
Two geographic areas that he particularly highlighted were China and Indonesia, where LCAL weighs 41% and 1.9% respectively.
5. VanEck Vectors Semiconductors UCITS ETF (SMH)
Our latest entry is a themed game on supply chains and consumer demand, the $ 803 million SMH, which is Europe’s largest ETF specifically targeting the semiconductor industry.
Charge a Relatively Low Fee for a Thematic ETF – 0.35% – SMH tracks the MVIS US Listed Semiconductor 10% Capped Index of 25 companies with at least 50% of their revenue from the production of semiconductors and semiconductor equipment -conductors.
To be considered eligible, companies must also have a market capitalization greater than $ 150 million, a three-month average daily revenue greater than $ 1 million, and a transaction volume of at least 250,000 per month. six months.
When it comes to thematic coins, few outside of sustainability-related themes have received as positive coverage from asset managers as semiconductors.
In its consensus outlook for 2022, PIMCO said semiconductor manufacturers were among the likely primary beneficiaries of the increased digitization trend, with the vital IT component expected to benefit from lockdown conditions (with demand for virtual hardware) or a continued return to normality (as manufacturing activity continues to recover).
BlackRock, which has its own semiconductor ETF, said there is growing demand for increasingly advanced and politically important microchips, with current demand and stretched supply chains meaning they will remain a commodity. sought in the predictable.
Over the past year, SMH has also performed well, with a 12-month return of 40.3% through December 17, according to data from ETF Logic.
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