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Inflation would be the large market theme this 12 months, two ETF consultants agree. Right here’s one approach to play it

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Inflation will once more dominate as a market theme this 12 months, in accordance with two ETF consultants.

“That is going to be a giant story in 2022,” Tom Lydon, CEO of ETF Developments, advised CNBC’s “ETF Edge” on Monday.

What’s extra, rising costs and a Federal Reserve prepared to boost charges in response might spell bother for the fastened earnings market – longer-term bonds sometimes fall when rates of interest are on the rise.

“Most do not bear in mind what it is wish to spend money on fastened earnings throughout rising rates of interest. It is simply not good for a set earnings portfolio. We’re surveying advisors on a regular basis which are transferring their 60-40 methods to 70-30 and even 80-20,” Lydon mentioned, referring to the final portfolio rule of thumb of being weighted 60% to equities and 40% to fastened earnings.

As a substitute of cash flowing into bond ETFs, for instance, Lydon says buyers are as an alternative trying to fairness dividends or choices overlay methods such because the JEPI JPMorgan fairness premium earnings ETF. That JEPI ETF has risen greater than 12% prior to now 12 months, whereas conventional bonds ETFs such because the AGG core U.S. combination bond ETF and the BND complete bond market ETF have fallen.

“I believe we’ll see extra of these varieties of methods come to the floor,” mentioned Lydon.

Astoria Portfolio Advisors chief funding officer John Davi has developed one approach to hedge in opposition to inflation ought to costs proceed to rise even with the Fed tightening financial coverage. On the finish of 2021, the agency launched the PPI AXS Astoria inflation delicate ETF.

“Going again a 12 months, a 12 months and a half in the past, I used to be on CNBC and I mentioned, ‘Look, I believe charges are rising, inflation is rising… We have seven ETFs that we’re attempting to make use of to cobble collectively an inflation theme. Let’s take a look at a possible ETF that gives a one-ticker answer that provides you broad market publicity to not solely cyclical shares which profit from rising inflation, but additionally bodily commodities, commodity equities, and TIPS.’ “

His ETF is weighted 70% to 80% towards cyclical shares, 10% to fifteen% in commodities, and 5% to 10% in TIPS. High holdings embody Western Alliance Bancorp, Areas Monetary, Zions Bancorporation and Devon Power.

“It’s best to embrace [inflation] after which search for methods that profit so the ETF has the 4 sectors are industrials, vitality, supplies and banks. These sectors traditionally have had probably the most sensitivity to rising inflation,” Davi mentioned.

The PPI ETF has risen practically 4% this week. By comparability, the S&P 500 has fallen greater than 1%.

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