After my column last week, in which I deplored the shortage of acceptable inflation-sensitive ETFs, some readers sent suggestions for alternatives to consider.
None meet all the specific criteria I identified, but I found three that are worth a look. Here they are.
Purpose Diversified Real Asset Fund (PRA-T). This exchange-traded fund invests in several sectors whose assets should appreciate in inflationary times, including agriculture, energy, base metals, precious metals and real estate. Each segment is weighted by risk, resulting in equal volatility contributions to the overall portfolio. The ETF is based on an underlying mutual fund that has a track record going back to 2013.
Almost a third of the portfolio (31.4 per cent) is in base metals. The other key components are agriculture (16.2 per cent), energy (16.1 per cent), precious metals (15.7 per cent) and real estate (14.6 per cent). About 6 per cent of the portfolio is in cash.
The fund holds some key stocks in each sector, including Exxon Mobil Corp., Archer-Daniels-Midland Co., Nutrien Ltd., American Tower Corp., Barrick Gold Corp. and Simon Property Group Inc. But it also invests heavily in commodity futures, including Brent crude, soybeans, corn, wheat, palladium and silver.
The ETF gained 23.8 per cent in 2021. The average annual return since inception is only 4 per cent but, to be fair, conditions haven’t really been right for a portfolio of this nature until recently. The fund started slowly but has been profitable over the past three years. So far in 2022 it’s ahead by 1.1 per cent.
It’s not a cheap fund, with an MER of 0.72 per cent. Distributions are paid quarterly at the rate of 7.5 cents (30 cents a year), to yield 1.2 per cent. The fund has about $100-million in assets under management. It closed Wednesday on the TSX at $25.04.
Invesco DB Commodity Index Tracking Fund (DBC-A). This ETF is for aggressive investors only. It’s designed for those who want a cost-effective and convenient way to invest in commodity futures. The underlying index is composed of futures contracts on 14 of the most heavily traded and important physical commodities in the world. These include gasoline, crude oil, gold, aluminum, soybeans, corn, wheat, copper, zinc, natural gas, sugar and silver.
The fund was created in early 2006 and has an MER of 0.87 per cent. Distributions, if any, are made annually, but not every year. The last payout was in December, 2019, for about 25 US cents a unit.
This is a highly volatile fund. It’s doing well in the current environment, with a gain of 42.5 per cent in 2021 and 7.5 per cent in the first four weeks of January. But the 10-year average annual compound rate of return is 1.8 per cent and the average return since inception is minus 0.5 per cent. This is clearly not a buy-and-hold security.
Invesco advises that this is a speculative fund that trades in very volatile futures markets. There’s a lot of upside potential at present because of the inflationary environment, but don’t discount the risk of significant losses.
The units closed Wednesday in New York at US$22.60.
AXS Astoria Inflation Sensitive ETF (PPI-A). This is a brand-new entry, launched on Dec. 30, 2021, so we have no history on which to judge its performance.
However, it does contain one element that is missing from all the other inflation-sensitive ETFs we’ve looked at: bank stocks. As I noted last week, bank profit margins are positively affected by rising interest rates, which improves their net interest margin (NIM). That’s the difference between what banks collect on loans and the amount they pay out in interest to depositors.
Three of this fund’s top five holdings are financial institutions: Regions Financial Corp., Western Alliance Bancorp and Zions Bancorp. Two petroleum companies, Marathon Oil Corp. and ConocoPhillips, round out the top five.
PPI may also invest in the industrial and materials sectors, as well as in other ETFs that invest in commodities and fixed-income securities. Examples of companies that the managers believe may benefit from rising inflation include financial services, consumer discretionary (such as home builders and household durables), companies producing industrial machinery, metals and steel, and those engaged in the exploration, production, transportation and mining of commodity assets. The latter include oil, gas, coal, agriculture, minerals and other real assets, including the passive ownership of royalties or production streams of such assets.
PPI may also invest in other ETFs with exposure to commodities that the managers believe may benefit from higher demand, elevated global growth, or a shortage of supply, such as Brent and WTI crude, copper, natural gas, gold, silver, platinum, palladium, soybean, live cattle, coffee and corn.
In addition, the fund may hold ETFs invested in Treasury Inflation-Protected Securities, inflation-protected public obligations of the U.S. Treasury commonly known as TIPS.
Of all the inflation-sensitive funds I’ve looked at, this one appears to offer the best balance and the lowest potential volatility. It’s too new for a formal recommendation, but if you’re interested in an ETF of this type, it is worth a look.
The fund was launched at US$25 a unit. In its first month of existence, it traded in a range of US$23.81 to US$28.26. It closed Wednesday at US$26.29.
Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to www.buildingwealth.ca/subscribe
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