Sometimes old foes are hard to get rid of. For investors, that old foe could be inflation. After the post-pandemic spike, inflation has certainly shrunk from its highs. The steady hand of rising prices never really went away, stubbornly making itself known in the shadows. These days, it looks like inflation has come out of the shadows once again.
Inflation is starting to climb.
For many investors, fighting the loss of purchasing power has continued to be a struggle. It’s a fight that can be won, and active ETFs can help. Thanks to a whole herd of new strategies and access to asset classes, active ETFs can help reduce inflationary risks and battle back the rising tide of higher prices in a portfolio.
Inflation Marches Higher
To their credit, the Federal Reserve has done a marvelous job bringing down inflation from its 1980s-style peaks seen in the post-pandemic days. If you remember, a combination of pent-up demand, consumer snap-backs, stimulus, and supply chain woes came together to create one of the worst inflationary environments in decades- hitting a peak of 9.1% in June of 2022.
The Fed took action, raising interest rates, ending various quantitative easing programs, and beginning to reduce the size of its balance sheet. With that, inflation broke and moved lower to more comfortable levels. This chart from news agency CNBC highlights just how far we’ve travelled in a few short years when looking at both the regular consumer price index (CPI) and core CPI figures.
Source: CNBC
It’s easy to see that the trend for inflation has been lower over the last few years; the troubling factor is what is at the end of the curve. If you notice, inflation is starting to move higher.
The June CPI report showed that inflation rose by 2.7% year-over-year. Excluding volatile food and energy prices, core inflation picked up 0.2% on the month and an annual rate of 2.9%. The latest reports for July aren’t any better and only show further acceleration. The Bureau of Labor Statistics reported that the core CPI increased 0.3% for the month and 3.1% from a year ago, while the regular CPI increased a further 0.2%, staying steady at a 2.7% annual pace.
Officials and economists tend to focus on core inflation as it’s a better predictor of long-term trends. That trend seems to be that tariff-induced inflationary woes are now coming to roost. Tariff-sensitive goods have now seen two months’ worth of price spikes. The fear is that this inflation is not going to be transitional. During the latest FOMC meeting minutes, Fed governors expressed worries that the tariffs may complicate inflation further, noting “the uncertain effects of tariffs and the possibility of inflation expectations becoming unanchored” and “considerable uncertainty remained about the timing, magnitude, and persistence of the effects of this year’s increase in tariffs.”
Fighting Inflation’s Return
With inflation starting to rise and not abating anytime soon, fighting the force is still a concern for many investors. The steady rise in prices can impact purchasing power and reduce financial readiness for retirees. The win is that there are now several tools that portfolios can employ to fight inflationary pressures.
One of them happens to be active ETFs.
ETFs have taken the investment world by storm and are a great way to fight inflation. Thanks to the boom and sheer number of fund launches, there are now several strategies and asset classes that investors can use to fight inflation.
For example, because active managers don’t have to look like a passive bond or stock index, they can strategically select companies or fixed income securities expected to perform well during inflationary periods.
On the equity side, this can include companies with pricing power or the ability to pass on price increases to their customers; those that own/operate tangible assets like infrastructure or real estate, whose revenues often include inflationary price increases; or those involved in commodities production that profit as natural resources gain in price.
For fixed income assets, this can include looking beyond the Agg and owning floating-rate bonds, asset-backed securities, and treasury inflation-protected securities, or TIPS, as well as other various swaps and other fixed income options. Additionally, active managers can handle duration and credit risk issues as part of their investment thesis. TIPS are great, but they tend to have longer durations and can fall as yields/interest rates rise. Active managers can effectively manage duration better than a broad passive index.
Finally, numerous actively managed commodities funds directly bet on futures and the direction of commodity prices. Again, deafferentation between commodities can lend itself to additional returns. After all, gold and corn aren’t the same and don’t react the same during different economic periods. Active management can enhance this fact.
The best active ETF innovation on the fighting inflation front remains the growth of so-called real asset or real return funds. These funds shift their allocations and asset class holdings across the wide range of asset classes to create an optimized basket of inflation-fighting securities for the “here & now” as well as managing future inflationary expectations.
Ultimately, the idea is that active management and its nimbleness lend themselves well to inflation fighting. Unlike passive ETFs that track an index, the greater flexibility of active funds to adjust their holdings based on economic changes, including rising inflation and interest rates, is a key win for portfolios.
Active with inflation Fighting
With inflation staying steady and starting to rise, investors need to consider it in their investing plans and allocations. Fortunately, active ETFs can make short work of the issue and fight back across a variety of strategies and asset classes. The nimbleness of being active is why it works.
Now, investors have a lot of choice in the sector across various asset classes and themes. Many analysts suggest including inflation-fighting as a dedicated sleeve of a portfolio encompassing about 10% of assets. This can include a mix of bonds, commodities, tangible assets, and stocks designed to fight the issue.
Inflation Focused Active ETFs
These ETFs were selected based on their ability to provide low-cost and active exposure to the inflation-fighting asset classes and strategies. They are sorted by their YTD total return, which ranges from 3.2% to 13.4%. They have expense ratios between 0.12% and 0.92% and assets under management of $5M to $1.26B. They are yielding between 1.5% and 4.7%.
| Ticker | Name | AUM | YTD Total Ret (%) | Yield (%) | Exp Ratio | Security Type | Actively Managed? |
|---|---|---|---|---|---|---|---|
| RAAX | VanEck Inflation Allocation ETF | $132M | 13.4% | 1.7% | 0.95% | ETF | Yes |
| RLY | SPDR SSGA Multi-Asset Real Return ETF | $503M | 11.5% | 3.4% | 0.50% | ETF | Yes |
| INFL | Horizon Kinetics Inflation Beneficiaries ETF | $1.26B | 11.3% | 1.76% | 0.85% | ETF | Yes |
| FCPI | Fidelity Stocks for Inflation ETF | $226M | 10.6% | 1.5% | 0.16% | ETF | Yes |
| CMDT | PIMCO Commodity Strategy Active Exchange-Traded Fund | $373M | 9% | 3.2% | 0.92% | ETF | Yes |
| JCPI | JPMorgan Inflation Managed Bond ETF | $716M | 6.2% | 3.9% | 0.40% | ETF | Yes |
| DFIP | Dimensional Inflation-Protected Securities ETF | $924M | 6.3% | 4.7% | 0.12% | ETF | Yes |
| AVIE | Avantis Inflation Focused Equity ETF | $5M | 3.4% | 2% | 0.25% | ETF | Yes |
| CPII | American Beacon Ionic Inflation Protection ETF | $10M | 3.2% | 3% | 0.75% | ETF | Yes |
Overall, inflation is starting to roar back. Given its tricky nature to predict, an active approach is warranted. Fortunately, active ETFs and their ability to not look like an index and change their holdings as market conditions change are a key win for portfolios. By using active ETFs as a dedicated inflation-fighting sleeve, investors can look past the effects of inflation and focus on keeping their purchasing power intact.
Bottom Line
Active ETFs represent an excellent tool for fighting inflation. Investors could surely use it. With measures of inflation now starting to trend higher, active ETFs and their ability to own inflation-resistant asset classes will come in handy.
