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Trading in financial markets involves significant risk of loss which can exceed deposits and may not be suitable for all investors.
Before trading, please ensure that you fully understand the risks involved
Trading in financial markets involves significant risk of loss which can exceed deposits and may not be suitable for all investors. Before trading, please ensure that you fully understand the risks involved

Tuesday, May 18, 2021

Inflation ETF’s to Watch Out For

By Century Financial in Investment Insights

Inflation ETF’s  to Watch Out For
Inflation ETF’s to Watch Out For

*Trading in financial markets carries risk and can result in loss of capital
*This performance is only observed with historical backtests and not traded by the company

The product and investment ideas do not consider the risk profile and financial position of the recipient and may not be suitable for everyone. Trading in financial markets and use of margin involves a significant risk of loss, which can exceed deposits. Please read the complete disclaimer carefully.
Risks & Assumptions
The flyer is for information and analysis purpose only with no specific BUY | HOLD | SELL recommendation on any of the mentioned ETF’s.
The ETF’s are passively indexed to their respectively underlying’s. Performance of ETF will dier from the performance of those indices or assets due to various reasons including ETF tracking error.
As ETFs are index linked products, investors investing in them are exposed to operational risk in the calculation of the index.

Inflation, often considered as taxation without legislation, has suddenly become the talking point for the markets. A look at the Google search trend for inflation in the US region shows record internet search for this term (April search trend estimates even going above its previous 15 year high of 59). Current trend analytics estimate point towards further spike for the current month. Similar trends can be seen for world-wide search for this term with the current series level expected to top above its 2008 high of 91.

One of the major reasons for the current scare is the continuous increase seen in US inflation numbers released over the past couple of months. As evident from the chart below, US CPI numbers are now expected to retest its previous 2008 series high of 5.6 %. Recently released April estimates have even surpassed its previous 2011 high of 3.9%. This has created a loopback cycle with most of the dierent duration US breakeven swaps about to retest their 2005 – 2006 highs. Inflation has been rising across both the producer as well as the consumer level. China’s factory price inflation for April month has hit its highest levels seen since mid’2017.

US CPI y-o-y (Source: Bloomberg | Duration: Last 20 Years)

ETF’s to diversify away from Inflation Threat

Below are some of the ETF that can be looked for countering inflation threat.

ETF Ticker
ETF Name Last Price
(As of 14/05/2021)
52 W Low 52 W High Category AUM ($ millions) YTD Returns
(As of 14/05/2021)
$ TIP i-Shares TIPS Bond ETF $127.75 $118.6 $128.29 US Fixed Income Inflation Protection Bonds 27,010 0.24%
$ VNQ Vanguard Real Estate Index Fund ETF $97.08 $71 $99.5 US REIT Investment 37,480 17.34%
$ IGE i-Shares North American Natural Resources ETF $30.87 $18.5 $31.6 US Natural Resource Industries 459.6 23.5%
$ VTV Vanguard Value ETF $140.16 $96.3 $142.28 US Large Cap Value Stocks 78,980 14.9%
$ GLD SPDR Gold Trust ETF $172.69 $157 $194.4 Physical Gold Investments 60,530 -7.1%

The ETF seeks to track the investment result of an index composed of inflation protected US inflation bonds. The ETF might come in handy to counter further rise in inflationary expectations. The ETF currently holds around 56 securities with average portfolio duration of 7.5 years.

$ TIP Daily Line Chart (Source: Bloomberg | Date: Jun’2018 – Till Date)


The ETF tracks the performance of MSCI US Investable Markets Real Estate Index that comprises some of the top REIT’s. Real estate has typically shown high positive correlation with rising inflation scenario. Some of the ETF’s top holdings include American Tower Corp, Equinix & Simon Property Group.

$ VNQ Daily Line Chart (Source: Bloomberg | Date: Jun’2018 – Till Date)


With commodities riding high on inflationary concerns, natural resources & mining is one sector that is set to gain further. The ETF provides exposure to US & Canada based natural resource companies. Some of its major holdings include Freeport-McMorRan, Chevron, Barrick Gold Corp.

$ IGE Daily Line Chart (Source: Bloomberg | Date: Jun’2018 – Till Date)


Current money rotation from growth to value stocks has seen huge investor interest build up for value portfolios. As a result, further rise in inflationary expectations is positive for US large cap value stocks with the ETF providing a decent exposure window for the same. The ETF has major allocations to Financials with banks likely to gain should inflation & interest rate increase go hand in hand. Some of the top holdings include JPM, BoA, Berkshire Hathway.

$ VTV Daily Line Chart (Source: Bloomberg | Date: Jun’2018 – Till Date)


The ETF is one of the major proxies for physical gold investments. Markets are increasingly eying further gold spike now that it has bounced back strongly from its support bottom of $ 1,650 - $ 1,700.

$ GLD Daily Line Chart (Source: Bloomberg | Date: Jun’2018 – Till Date)

Risks and Assumptions for Back-tested trading strategies
The risks and assumptions listed here are not intended to be an exhaustive summary of all the risks and assumptions involved.
The strategy might suffer from look-ahead bias which occurs due to the use of information or data in a study or simulation that would not have been known or available during the period being analyzed. This can lead to inaccurate results in the study or simulation.
Future price movements may not be exactly the same as the historical price movements and this could lead to variation in performance.
Testing can sometimes lead to over-optimization. This is a condition where performance results are tuned so high to the past they are no longer as accurate in the future.
The model assumes no slippages in trading. Slippage refers to the difference between the expected price of a trade and the price at which the trade is actually executed.
Drawdowns in actual trading can be higher than the tested system and losses could be significant in the event of leverage.
Unforeseen events can lead to variation in performance from the tested trading strategy.
The tested result has been computed with price feeds available from Bloomberg.
The testing environment has not considered transaction or any other costs.
Trading indicators used for the purpose of testing has been provided by Bloomberg.
The strategy might suffer from data mining fallacy, selection bias and backfill bias.

Data Source: Bloomberg
Date: 14/05/2021 (US Market Close)

Arun Leslie John
Chief Market Analyst

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