Latest / Inflation and Your Money with Fexingo: Protecting Purchasing Power and Beating Inflation / Inflation Is Quietly Reshaping the ETF Industry Landscape
Transcript
- Lucas: So the S&P 500 just had a five-day stretch where it lost three and a half percent. NASDAQ fell over five percent. And gold? Down more than four percent in just one week. That is not a normal week, and it raises an interesting question about what's actually working as an inflation hedge right now. Luna: Yeah, especially when CPI data for May just came in at 334, up from 332.41. Core inflation is still sticky. So if both stocks and gold are selling off, where do people go? Lucas: That's exactly the question. And the answer, increasingly, is showing up inside the ETF industry. We're seeing a really significant rotation in where money flows, and it's reshaping the product lineup that fund companies are offering. Luna: Walk me through it. What's actually happening on the ground? Lucas: Well, the first big shift is out of pure growth ETFs and into value-oriented funds. The iShares S&P 100 Growth ETF, ticker o g f, is down about six percent over the past month. Meanwhile, the iShares S&P 100 Value ETF, ticker I-O-V, is basically flat. That's a huge divergence. Luna: So investors are basically saying growth companies' future earnings are worth less when inflation stays above the Fed's target. Makes sense. But it's not just about value vs growth, right? Lucas: No, it's not. The second big trend is the surge in TIPS ETFs — Treasury Inflation-Protected Securities. The iShares TIPS Bond ETF, ticker T-I-P, has seen net inflows of over four billion dollars so far this year. That's up more than 60 percent from the same period last year. Luna: And that's despite the fact that the ten-year breakeven inflation rate has actually come down a bit, from 2.35 to 2.33 percent. So people are still piling in even as the inflation expectation cools slightly. Lucas: Exactly. It's almost like a structural shift. People want explicit inflation protection built into their bond holdings, not just a bet that rates will go down. And the ETF industry is responding. Just last month, Vanguard launched a new actively managed TIPS fund, and State Street just filed for an ETF that tracks inflation swap indices. Luna: Inflation swaps — that's pretty niche. Who's the target buyer for that? Lucas: Institutional investors, mostly. But the fact that they're packaging it into an ETF format tells you there's demand from advisors and maybe even sophisticated retail investors who want a direct play on inflation without owning physical commodities or TIPS. Luna: And speaking of commodities, gold ETFs have been getting crushed. GLD is down almost 8 percent over the past five days. GDX, the gold miners ETF, is off 13 percent. That's a brutal week. Lucas: It is. And it seems counterintuitive — inflation is still elevated, so why is gold falling? I think part of it is that the dollar has been relatively strong, and there's been a lot of chatter about the Fed possibly having to raise rates again if core inflation doesn't come down. Higher real rates are bad for gold. Luna: Right, because gold doesn't pay a yield. So if you can get 3.65 percent on reserve balances risk-free, gold's opportunity cost goes up. But some people are rotating into other commodity ETFs, right? Lucas: Yeah, the broad commodity ETFs like the Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF, ticker p d b c, have seen inflows this month. Energy and agricultural commodity ETFs have held up better than precious metals. So there's a rotation within commodities too. Luna: Let's talk about fixed-income ETFs more broadly. Because if inflation stays sticky, longer-duration bonds are still vulnerable. The iShares 20+ Year Treasury Bond ETF, ticker T-L-T, is down about 8 percent year-to-date. Lucas: Right, and that's a problem for a lot of conservative portfolios that thought they were being safe by owning long-term Treasuries. The inflation-adjusted return on those has been negative. So we're seeing a shift toward shorter-duration bond ETFs, floating-rate note ETFs, and of course TIPS. Luna: And this is where I think the ETF industry itself is changing. The product lineup five years ago looked very different. Now you have ETFs for pretty much every inflation scenario — from commodities to TIPS to inflation swaps to real estate. Lucas: Exactly. And that means investors have more tools, but also more complexity. You have to know what you own. A TIPS ETF is not the same as a commodity ETF, and they perform very differently depending on the type of inflation we get — demand-pull vs cost-push, for example. Luna: And we're seeing the Fed hold rates steady at 3.63 percent effectively. If they don't cut soon, the carry on TIPS actually becomes quite attractive. The real yield on 10-year TIPS is around 1.3 percent now. Lucas: That's a big deal. A year ago, real yields were negative. Now you can get a positive real return from TIPS. That's why they're attracting flows even as breakevens tick down. The product is finally delivering on its promise. Luna: You know, one thing that strikes me in all this is how much the ETF industry has become a mirror of macroeconomic anxiety. Every new product launch feels like a response to some fear — inflation, recession, geopolitics. Lucas: That's a really good point. And if you look at the flows data, it's clear that inflation is the dominant fear right now. Even with the market sell-off this week, money is still going into inflation-focused ETFs. That's a signal. Luna: Speaking of signals — and I want to tie this back to something we talk about on this show a lot. We keep these episodes ad-free because we think these conversations matter, and we don't want to interrupt them with commercials. If you've found our inflation coverage useful — whether it's helped you think about your TIPS allocation or just understand what's happening in markets — you can support that choice at buy me a coffee dot com slash fexingo. Lucas: Yeah, that link is really the only way we keep this going without ads. It's a small gesture that lets us stay focused on the substance. Appreciate anyone who chips in. Luna: So back to the ETF landscape — one more thing I want to highlight. The Invesco DB Commodity Index Tracking Fund, ticker d b c, is up about 4 percent over the past month. That's a broad commodity play, and it's been a quiet winner. Lucas: It has. And that's partly because energy and agriculture prices have stayed elevated. The Goldman Sachs Commodity Index is up. So if you want inflation protection without picking individual commodities, that kind of ETF is a simpler option. Luna: But you have to watch the structure. Some commodity ETFs are structured as limited partnerships, which means you get a K-1 tax form at the end of the year. That's a pain for a lot of people. Lucas: Great point. That's why the PDBC ETF I mentioned earlier is structured as a C-corporation — no K-1. So the ETF industry is also innovating on the tax efficiency front to make inflation hedges more accessible. Luna: Alright, so if someone listening wants to adjust their portfolio for inflation using ETFs, what's the simple takeaway? Lucas: I'd say three things. One, if you own long-term nominal bonds, consider swapping some of that for TIPS — specifically short- or intermediate-term TIPS ETFs. Two, consider a small allocation to a broad commodity ETF for diversification. And three, if you're holding gold, understand that it's volatile and can sell off sharply even when inflation is high, as we saw this week. Luna: And don't forget that the ETF you choose matters. Two TIPS ETFs can have different durations, different expense ratios, and different tax treatments. Read the prospectus. Lucas: Absolutely. The ETF industry is giving us more tools than ever to deal with inflation, but they're not all created equal. The good news is you can get precise protection. The bad news is you have to be precise about what you're buying. Luna: On that note, we'll keep watching the flows. Next week, we'll look at how inflation is affecting consumer staples ETFs — spoiler, it's not just about buying Coca-Cola anymore. Lucas: Looking forward to it. Thanks for listening.