Inflation is 'thorn' in market's side - but these ETFs rose even as stocks, bonds fell

By Christine Idzelis

Without a recession, 'it's going to be a tough task' for the Fed to bring inflation down to its 2% target, says Ionic Capital's Doug Fincher

Hello! This week's ETF Wrap shines the light on some fund strategies that stood out for posting gains even as markets broadly sold off Wednesday on inflation fears.

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Some exchange-traded funds rallied Wednesday even as stocks and bonds broadly fell, as hot inflation data stoked fears that interest rates will stay elevated for longer than anticipated.

"It was a bad day in markets" as investors fretted over data from the consumer-price index that showed higher-than-expected inflation in March, but some trading strategies worked in that environment, said Doug Fincher, a portfolio manager at Ionic Capital Management, by phone.

The Ionic Inflation Protection ETF CPII - which has exposure to inflation swaps, interest-rate swaptions and Treasury inflation-protected securities - rose a sharp 1.2% on Wednesday and has posted a total return this year of 5%, according to FactSet data. The Simplify Interest Rate Hedge ETF PFIX rallied about 7% that same day, bringing its total return this year to almost 28%.

"Volatility around inflation has been, and will continue to be, a thorn in the market's side," said Fincher. Without a recession, "it's going to be a tough task" for the Federal Reserve to bring inflation down to its 2% target, according to Fincher, who said the market is pricing in an annual inflation rate of 2.57% as far out as five years from now.

He said the Ionic Inflation Protection ETF should book gains as readings from the consumer-price index register inflation above the Fed's target, and that it also benefits from rising interest rates. The fund is meant "to counterbalance risk in portfolios that is hard to hedge" when interest rates and inflation are rising, said Fincher.

Managed futures strategies also posted gains on Wednesday as CPI data roiled markets.

For example, the Simplify Managed Futures Strategy ETF CTA jumped 3.2%, bringing its 2024 gains to 12.7% through Wednesday on a total-return basis, FactSet data show. And the iMGP DBi Managed Futures Strategy ETF DBMF climbed 1.9% Wednesday, booking a total return of 15.2% this year through yesterday.

Managed futures strategies are typically seen in the hedge-fund industry, with commodity-trading advisors making bets on futures contracts tied to commodities, interest rates, currencies and stocks.

JPMorgan Chase & Co. strategists said in a research note this week that investors should stay overweight commodities to protect against inflation risks.

The Bureau of Labor Statistics said Wednesday that the consumer-price index showed U.S. inflation rose 0.4% last month and at a year-over-year pace of 3.5%, with shelter and gasoline prices driving the monthly increase.

Energy XX:SP500.10 was the sole sector of the S&P 500 SPX that rose on Wednesday, gaining 0.4%. The index finished the day down 0.9%, according to Dow Jones Market Data.

Real-estate, bank and bond ETFs sink

Wednesday's slump saw the S&P 500's real-estate sector get hammered, with shares of the Real Estate Select Sector SPDR Fund XLRE dropping 4.1% amid fears of higher rates.

The yield on the 10-year Treasury note surged 19.4 basis points on Wednesday to 4.559%, its biggest jump since Sept. 22, 2022, based on 3 p.m. Eastern time levels, according to Dow Jones Market Data. That marked the 10-year's highest yield since Nov. 13.

Bank ETFs also suffered large losses Wednesday amid rate worries; the SPDR S&P Regional Banking ETF KRE plunged 5% while the SPDR S&P Bank ETF KBE slid 4.1%, FactSet data show.

Bond ETFs fell, too, with longer-dated Treasurys being hit particularly hard as yields rose. Bond yields and prices move in opposite directions.

Shares of the iShares 20+ Year Treasury Bond ETF TLT finished 2.2% lower on Wednesday, bringing its total loss this year to 7.9%, according to FactSet data.

Meanwhile, the iShares Core U.S. Aggregate Bond ETF AGG dropped 1.2% - its biggest daily decline since September 2022 - dragging the fund down 2.7% on a total-return basis through Wednesday.

Read: Rising bond yields haven't kept tech stocks from outperforming - and have created this buying opportunity, says BlackRock

But as their prices fell, some investors stepped in to buy bond ETFs on Wednesday.

The iShares 20+ Year Treasury Bond ETF attracted $470 million on Wednesday, while the iShares iBoxx $ High Yield Corporate Bond ETF HYG saw $362 million of inflows, the iShares Core U.S. Aggregate Bond ETF took in $281 million and the iShares 1-5 Year Investment Grade Corporate Bond ETF IGSB received about $207 million of capital from investors, according to FactSet data.

What about TIPS?

ETFs with inflation-protected strategies have broadly seen outflows this year through April 9, the day before the CPI data was released, according to Aniket Ullal, head of ETF data and analytics at CFRA Research.

The inflation-protected category tracked by CFRA largely comprises ETFs that invest in Treasury inflation-protected securities, or TIPS, Ullal said in a phone interview.

Many investors who held TIPS in 2022 suffered losses because they were exposed to duration risk in longer-term bonds as inflation surged and interest rates jumped, according to Fincher.

"They got killed on the duration," said Fincher, who is co-portfolio manager of the Ionic Inflation Protection ETF, which launched in June 2022 as inflation was soaring in the U.S. He said that he prefers TIPS with shorter durations that mature between zero and two years.

Shares of the iShares 0-5 Year TIPS Bond ETF STIP fell 0.4% Wednesday for a total return this year of 0.6%, according to FactSet data. The fund is outperforming the iShares TIPS Bond ETF TIP, whose portfolio has a longer effective duration.

The iShares TIPS Bond ETF dropped 1% Wednesday, bringing its total loss this year to 1.5%, according to FactSet data. In 2022, the ETF tumbled 12.2% on a total-return basis, faring worse than the iShares 0-5 Year TIPS Bond ETF, which lost a total 3% that year.

Bonds and stocks both broadly fell in 2022 as inflation and rising rates rocked markets, with the iShares Core U.S. Aggregate Bond ETF plummeting a total 13%. By contrast, the Simplify Interest Rate Hedge ETF had a massive total return of 92% in 2022, while the iMGP DBi Managed Futures Strategy ETF gained a total 21.5% that year.

As usual, here's your look at the top- and bottom-performing ETFs over the past week through Wednesday, according to FactSet data.

The good...

   Top performers                                                                                                                                                                        %Performance 
   Global X Silver Miners ETF                                                                                                                                                            5.3 
   United States Natural Gas Fund LP                                                                                                                                                     5.2 
   Amplify Junior Silver Miners ETF                                                                                                                                                      4.3 
   Global X Copper Miners ETF                                                                                                                                                            3.9 
   iShares Silver Trust                                                                                                                                                                  3.9 
   Source: FactSet data through Wednesday, April 10. Start date April 4. Excludes ETNs and leveraged products. Includes NYSE-, Nasdaq- and Cboe-traded ETFs of $500 million or greater. 

...and the bad

   Bottom performers                                    %Performance 
   iShares MSCI South Korea ETF                         -4.2 
   PIMCO 25+ Year Zero Coupon U.S. Treasury Index ETF   -3.6 
   iShares U.S. Home Construction ETF                   -3.4 
   iShares Mortgage Real Estate ETF                     -3.4 
   Vanguard Extended Duration Treasury ETF              -3.3 
   Source: FactSet data 

New ETFs

Fidelity Investments announced Thursday that it launched three options-based ETFs, including the Fidelity Dynamic Buffered Equity ETF FBUF, Fidelity Hedged Equity ETF FHEQ and Fidelity Yield Enhanced Equity ETF FYEE.Westwood Holdings Group said April 9 that it launched the Westwood Salient Enhanced Midstream Income ETF MDST, which seeks to invest in midstream energy companies that gather, transport, store and distribute products like crude oil and natural gas. PT Asset Management said April 9 that it listed its first exchange-traded fund, the Performance Trust Short Term Bond ETF STBF.Fred Alger Management announced April 8 that it launched the Alger AI Enablers & Adopters ETF ALAI and Alger Concentrated Equity ETF CNEQ.

Weekly ETF reads

Tesla overtakes Coinbase as top holding of Cathie Wood's flagship ETF (MarketWatch)Saba ETF Piles Into Equity Closed-End Funds Eying Big Discounts (Bloomberg)Grayscale CEO sees bitcoin ETF outflows reaching equilibrium (Reuters)AI Stock Frenzy Spurs $50 Billion ETF Boom in Taiwan (Bloomberg)US active ETF flows soar past previous records (Financial Times)

-Christine Idzelis

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04-11-24 1758ET

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