ETFs for Inflation and Rising Rates

Later, Geraci is joined by Sarah Kjellberg, head of U.S. iShares sustainable ETFs, and Guillermo Cano, executive director of MSCI Global Index Research Solutions, to talk about the impact that Russia’s invasion has had on ESG and the decarbonization transition. Finally, Dean Smith, chief strategist at FolioBeyond, is on to discuss the FolioBeyond Rising Rates ETF (RISR) as well as his hot take on bond markets.

The discussion opens on Rosenbluth’s recent move to ETF Trends and ETF Database before diving into a recent survey regarding how advisors are allocating and seeking income given the current inflationary environment.

“58% of the respondents chose using dividend strategies as a way of getting income, significantly higher than the choice of alternatives; it’s higher than real estate, higher than high yield, and higher than options premium,” Rosenbluth says.

Vanguard offers the two largest dividend ETFs on the market, the Vanguard Dividend Appreciation ETF (VIG A) and the Vanguard High Dividend Yield ETF (VYM A+), while iShares offers the fourth-largest, the iShares Select Dividend ETF (DVY B+), and has been the best performer this year, demonstrating the importance of looking under the hood of funds, Rosenbluth explains.

“You’ve got to make sure you understand what you’re getting, and if you want an income-generating strategy that will have exposure to the more defensive or even the more cyclical areas of the market, but understanding energy is cyclically different from technology, for example, it’s important to make sure you’ve got a close look at that,” Rosenbluth says.

There has been a bevy of inflation-related ETFs launching in the last year, including the Horizon Kinetics Inflation Beneficiaries ETF (INFL B-) and the AXS Astoria Inflation Sensitive ETF (PPI), which allow investors a chance to invest not in funds that push back against inflation, but in sectors and securities that are benefitting in an inflationary environment.

Guillermo Cano, executive director of MSCI Global Index Research Solutions, discusses the impacts of Russia’s invasion of Ukraine for MSCI indexes and Russia being moved from emerging markets indexes to its own standalone index. The move was done in consultation with institutional investors globally and in adherence to MSCI’s own rules for its indexes.

Sarah Kjellberg, head of U.S. iShares sustainable ETFs, talks about the renewed attention to the energy transition that the Russia-Ukraine war has brought with its impact to the energy sector, and a recent annual letter from the Blackrock CEO, Larry Fink, that addressed the current environment.

“Energy security has really joined to energy transition as a top priority, and it can only work if it’s going to be fair and just, and also the supply gap will certainly slow some of the progress; we’ve seen the U.S. already increasing oil and gas supply, Europe and Asia have increased their coal consumption,” Kjellberg says.

Kjellberg and Cano discuss various ESG investment strategies and options for investors and their different merits.

Last on is Dean Smith, chief strategist at FolioBeyond and portfolio manager of the FolioBeyond Rising Rates ETF (RISR). RISR is an actively managed fund that carries interest-only mortgage backed securities, securities that are only the interest portion of mortgage backed securities and do not contain the principal. The fund has a -10 year duration.

“MBSIOs are one of the only securities in the marketplace that naturally have negative duration,” Smith explains. “When interest rates rise, they increase in value.”

It’s based on the premise that in rising rate environments, mortgage borrowers will pay more slowly, meaning that the mortgages are outstanding for longer, and interest can be collected for longer.

Smith also discusses the Fed and its need to commit to raising rates after waiting what he believes to have been too long to act, as well as the role that bonds play in portfolios.

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