ETF Strategies to Chase Market Fluctuations
To overcome the volatility of the bear market and the continued uncertainty of the Federal Reserve, investors try to use inflation for potential profit.
Beyond traditional strategies using only Treasuries, more exchange-traded funds have entered the market for investors to chase inflation trading.
“Unsurprisingly, in the first half, he was an incredible performer,” Ben Slavin, global head of ETFs at BNY Mellon, told CNBC’s Bob Pisani in an interview Monday on “ETF Edge.”
“But there are other products that are coming to market where issuers are trying to really get investors interested in order to really offer these different ways to play,” he added.
Slavin highlighted the Direxion Breakfast Commodities Strategy ETF (BRKY) as one of these new products. As its name suggests, the fund is designed to provide exposure to commodities found on the breakfast table, including coffee, sugar, wheat and orange juice.
Another player in the inflation trade is the Simplify Interest Rate Hedge ETF (PFIX). The fund seeks to hedge interest rate fluctuations resulting from rising long-term rates and to take advantage of market stress when volatility in fixed income securities increases, while providing income potential.
“I think the longer term game, and something we’re going to see more of, is the interest in fixed income ETFs,” Slavin said. “Specifically, in actively managed space.”
Chasing inflation trading is not a recent strategy – the US Treasury began issuing Treasury Inflation-Protected Securities, or TIPS, in 1997 as security to provide protection against price swings. The principal rises with inflation and falls with deflation, according to the Treasury.
“Inflation is not just an American story, so TIPS are a fixed commodity,” Andrew McOrmond, managing director of WallachBeth Capital, said in the same interview.
TIPS has nearly $19 billion in assets under management with plenty of cash, he said, but inflows have slowed slightly. And Slevin noted that PFIX has outperformed TIPS since its launch in May 2021.
PFIX uses size and scale to hedge using OTC derivatives that mirror long-term cash hedges. The ETF normally invests in Treasury bills or TIPS directly or through other exchange traded funds.
“They’re more efficient,” McOrmond said. “Makes the product more effective and makes it charge a little less. It’s not the same story as before.”