Inflation continued to surprise investors this month with higher-than-expected rises in both the US and UK as consumer prices recorded their biggest jump in decades.

Data from the US Labor Department revealed inflation rose by 6.2% in the 12 months through October, up from 5.4% the month before, the fastest increase since 1990.

The UK also saw a sharp uptick, with inflation rising at its fastest rate since 2011 at 4.2%.

Inflationary rises have given a headache to policymakers on both sides of the pond – who for now continue to resist calls to raise interest rates – as they grapple with the issue caused by supply-chain bottlenecks and rising energy prices.

Last week, US Treasury secretary Janet Yellen said continuing to fight the pandemic was the best way to get inflation under control and added that removing Donald Trump-era tariffs from Chinese imports “would make some difference”.

Meanwhile, pressure is mounting on the Bank of England to raise interest rates at its next Monetary Policy Committee in December.

While the inflation rise was in some part anticipated, investors continue to be surprised by the size of the jump. The benchmark US 10-year Treasury yields climbed on the announcement, while short-dated US government bond yields also rose.

Despite this, the S&P 500 also shrugged off inflationary fears rebounding on the back of strong earnings figures despite the hawkish tone from policymakers that could disproportionally affect growth stocks.

In the UK, the FTSE 100 and FTSE 250 took a hit, falling half a percentage point each following the update.

With inflation anticipated to continue to rise into 2022, ETF Stream has selected five ETFs to help investors navigate a high inflation environment.

1. Invesco Bloomberg Commodity UCITS ETF (CMOD)

Leading our list is the $1.5bn Invesco Bloomberg Commodities UCITS ETF (CMOD) which replicates the movements in commodities futures prices.

With material inputs to fuel economic recoveries around the world in high demand, supply bottlenecks in energy, agriculture and metals have seen the prices of CMOD’s underlying index constituents boom in recent months, despite a recent slowdown in rocketing energy prices that has seen its performance drop off in recent weeks.

The economic recovery hinges on the continued supply of these commodities. In this sense, CMOD broadly tracks economic activity and output, which are both expected to continue rising as restrictions ease. Likewise, consumer prices are also heavily influenced by input costs, so as inflation indicators rise, this likely reflects higher returns are being enjoyed by commodities investors.

CMOD’s exposure to energy has risen in recent months to a 40% weighting. As a result, it has seen exposure to grains drop from 24.2% to 19.2%. It also has a 13.7% weighting to precious metals, which are a natural hedge against inflation, and a 14.7% weighting to industrial metals, both crucial to the ongoing recovery and the secular shift to clean energy.

2. Tabula US Enhanced Inflation UCITS ETF (TINF)

For those looking for fixed income plays, the $106m Tabula US Enhanced Inflation UCITS ETF (TINF) replicates the Bloomberg Barclays Enhanced Inflation index, combining the performance of Treasury inflation-protected securities (TIPS) and US 7-10 year breakeven inflation rates. 

The first ETF in Europe to combine these two features on a US Treasuries exposure, TINF launched in November 2020 and combines current TIPS performance with forward-looking inflation expectations.

With central banks reluctant to either shut off their asset buying programmes or bring forward their rates hikes, TINF and more run-of-the-mill inflation-linked products offer a way for bond investors to protect their returns.

3. iShares $ Ultrashort Bond UCITS ETF (ERND)

Another fixed income play investors could consider are short duration bonds. The $1bn iShares $ Ultrashort Bond UCITS ETF (ERND) is one such strategy that offers a duration of three years or less and allows investors to minimise interest rate risk.

While ERND has a duration of three years or less, 78.3% of the ETF has a maturity of one year or less, with 12.1% one to two years and 7.8% in two to three years. It tracks the Markit iBoxx USD Liquid Investment Grade Ultrashort index and has a total expense ratio of 0.09%.

For investors concerned that the so far accommodative monetary policies adopted by central banks might be starting to wane, those with low-risk appetites have been increasingly attracted to shorter maturity bonds due to their lower volatility.

4. Amundi Physical Gold ETC (GLDD)

A traditional safe-haven hedge for investors looking for protection from rising inflation and a weakening dollar, the $3.6bn Amundi Physical Gold ETC (GLDD is as good as any physically replicating the price performance of gold bullion across Europe.

As the US dollar fell in the decade up to 2008, the price of gold almost tripled. Likewise, amid quantitative easing following the 2008 Global Financial Crisis (GFC), gold doubled in value in the four years to 2012. Having fallen from its highs in 2020, the return of inflationary concerns has seen the price of gold rally and is set to continue to allow inflation to run.

However, a strengthening dollar and the growing anticipation of a rate hike next year has meant gold ended last week lower for the first time this month, despite being 4.2% up in the 30 days to 19 November.

SGLN is among the cheapest available in Europe and one of four products that offer the joint lowest fee of 0.12%. The others include the Ridgex GPF Physical Gold ETC (TAUS), the WisdomTree Core Physical Gold ETP (WGLD) and the iShares Physical Gold ETC (SGLN).

5. iShares UK Property UCITS ETF (IUKP)

A more wildcard inflation hedge, the $687m iShares UK Property UCITS ETF (IUKP) tracks the performance of equities on the FTSE EPRA/NAREIT UK Property index.

The economic recovery has seen demand for residential property soar across the developed world, with the FTSE EPRA/NAREIT developed index returning 30.2% year to date. The end of the Stamp Duty holiday was supposed to temper demand the shortage of homes prevented price falls following the stamp duty rush, while rental rates have increased since workers started returning to offices.

Something to note is IUKP’s high conviction position in Segro, which currently claims a 22.8% weighting. Primarily operating industrial premises and warehouses, investors might look to back the company as both a direct property play – with house price inflation pushing up rental revenues – and as a recovery exposure, with the return to work and pick-up in consumer activity likely to increase commercial leasing activity in the UK and European cities.

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