By Mark DeCambre
It is time to talk about talking about ETFs. Yes that’s a riff off what Federal Reserve chair, Jerome Powell, said about the central bank slowing bond purchases, as it’s just not possible to ignore the impact of Wednesday’s move by the Fed to start negotiating the fraught process of peeling back its easy-money policies, while dealing with the economic recovery from the global epidemic.
We won’t bore you with the particulars, but the Fed might hike interest rates earlier than expected, penciling in two rate increases in 2023. You can read about what Chairman Jerome Powell said and did here and the market’s reaction here and here and here , and the Fed’s view on interest rates here and on inflation .
But what does all that mean for exchange-traded funds? That’s what we’ll aim to tackle this week.
We will also look at VanEck’s efforts to put a bitcoin in an ETF wrapper. Nobody puts bitcoin in an ETF wrapper, or a corner — yet.
Meanwhile, the stock market midday Thursday was under pressure, with the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.21% , and S&P 500 /zigman2/quotes/210599714/realtime SPX -0.11% trading lower, and the Nasdaq Composite Index /zigman2/quotes/210598365/realtime COMP -0.82% was fighting to retain a modest gain .
As per usual, send tips, or feedback, and find me on Twitter at @mdecambre to tell me what we need to be jumping on. Sign up here for ETF Wrap.
Inflation & Interest rate plays
The Fed’s latest economic projections show that seven Fed officials expect to raise rates by the end of 2022, up from four in March. Thirteen of 18 Fed officials indicate that they expect to lift short-term rates by the end of 2023, up from seven.
Fed officials also expect the U.S. economy to grow 7% in 2021 from 6.5%, according to projections released Wednesday. Policy makers are expecting inflation to rise 3.4% in the fourth quarter from a 2.4% estimate in March. So the Fed’s current estimates are looking to be handily above its 2% annual target.
We chatted with CFRA’s Todd Rosenbluth on ways to play rising interest rates and inflation themes. He called out Quadratic Interest Rate Volatility and Inflation Hedge ETF /zigman2/quotes/212340916/composite IVOL -0.11% , which is going to make Nancy Davis, who launched it back in 2019, pretty jazzed.
Davis is an options guru, and former Goldman Sachs /zigman2/quotes/209237603/composite GS +1.65% trader, who thought a product like actively managed IVOL was a missed opportunity. The ETF is about 85% weighted in Treasury inflation-protected securities, or Treasurys that account for changes in inflation expectations, which are a big problem for assets with fixed assets like government bonds. Much of the rest of IVOL is in fixed-income options that could benefit if long-dated interest rates move higher, for example.
IVOL is flat this year but up 3.2% over the past 12 months.
MarketWatch has spoken with Davis in the past , where she said that she also views IVOL as a hedge against corrections in equity and real estate as the prices of stocks and properties tend to fall during times of increased fixed-income volatility.
IVOL, with $3.5 billion in assets, has an expense ratio of 0.99%, which means the fund will cost $9.90 for every $1,000 invested.
Rosenbluth also pointed to Horizon Kinetics Inflation Beneficiaries ETF /zigman2/quotes/223823582/composite INFL +0.64% , which boasts nearly $600 million in assets and has an expense ratio at 0.85%, and iShares 0-5 Year TIPS Bond ETF /zigman2/quotes/203441491/composite STIP +0.04% , which has $5.5 billion in assets and a 0.05% ratio, as solid inflation plays.
Horizon was launched near the start of the year and is up about 7% over the past three months, while the iShares inflation product is up 1.2% in the year to date and 3.5% over the past 12 months.
There are certainly a ton of other ways to play rising rates and inflation, including buying financials, like SPDR S&P Regional Banking ETF /zigman2/quotes/200108291/composite KRE +1.06% , Financial Select Sector SPDR Fund /zigman2/quotes/209660484/composite XLF +1.40% , Vanguard Financials ETF /zigman2/quotes/204539969/composite VFH +1.23% , which would capitalize on banks benefiting from higher long-term rates, which helps support their business models of borrowing short and lending long.