While inflation has been on investors’ minds for some time now, the timeframe for the Fed to make those dreaded adjustments may come sooner than expected, according to Dallas Federal Reserve President Robert Kaplan. Kaplan would like the Fed to state in September that it will start to adjust its monetary policy, citing that that the economy can be more autonomous.
At the same time, however, the Dallas Federal Reserve President is also worried about inflation and “excess risk taking” that has led to “distortions” in financial markets, particularly in bonds, a sentiment that other investors likely agree with as well.
“Based on everything I’ve seen, I don’t see anything at this point that would cause me to materially change my outlook,” Kaplantold CNBC
. “It would continue to be my view that when we get to the September meeting, we would be well served to announce a plan for adjusting purchases and begin to execute that plan in October or shortly thereafter.”
Kaplan discussed the pivotal question of when it will be appropriate to taper the $120 billion a month of bond purchases that has been occurring since the beginning of the coronavirus pandemic. Fed Chairman Jerome Powell may address these issues as well when he speaks as part of the virtual Jackson Hole symposium this week.
The Federal Reserve went on a massive bond-buying spree that included purchases of bond exchange traded funds (ETFs) at the height of the pandemic last year, in an attempt to shore up the economy and offer protection.
Peter Duffy, chief investment officer at Penn Capital, is therefore looking for a relaxed, noncommittal plan and believes that Powell may proffer a more modest tapering than investors expect, something less frequent than the projected monthly basis.
This additional caution could be due to the Delta variant of the coronavirus, which has become much more rampant, spreading throughout the U.S. this summer and stymieing the planned return to the office for many companies and industries.
“It’s unfolding rapidly,” Kaplan said on Fox Business Network last week, adding that the Delta variant is slowing down a return to the office and hiring and limiting production, which is exacerbating supply constraints. “The thing that I am going to be watching very carefully over the next month, before the next meeting, is [whether]it is having a more material impact on slowing demand and slowing GDP growth. I’m going to keep an open mind on that, and if it is having a more negative effect that might cause me to adjust my views somewhat from ones that I’ve stated,” he said.
Despite climbing Delta variant cases, Kaplan believes this isn’t currently having a broad or dramatic impact on the economy.
“What we’re seeing is businesses and consumers are learning to adapt and go on with their lives, and they’re realizing that this is not going to be neat and clean or a straight line,” Kaplan said. “It’s going to go in fits and starts, and they’re getting adjusted to that reality.”
While the coronavirus is less of a worry for the Dallas Federal Reserve President, he did express concerns about inflation.
July’s Consumer Price Index, released earlier this month, was less dramatic than expected, revealing that prices gained 5.4% since last year, compared to projections of 5.3%, according to economists surveyed by Dow Jones. The government said CPI increased 0.5% in July on a month-to-month basis. While the move could be worrisome for consumers, the securities markets seemed rather tepid following the release of the data.
But inflation has been operating near multidecade highs in 2021, and Kaplan pointed to the increasing gas and housing prices as factors affecting the lower-income communities in his district.
“What we’re seeing in these communities is inflation affects them disproportionately,” he said. “I think at the Fed we have to take that very seriously.”
He suggested that adjusting and tapering asset purchases could therefore be a potentially wise decision for markets and the economy.
“I think we’ll be a lot healthier if we could soon wean off the purchases, and it will put us in a lot better position going forward,” he said.
For investors looking for an ETF approach to investing in the current inflationary environment, there are several options to consider, such as dividends, commodities, and bonds.
Because inflation can hit different sectors in different ways, it is important to have a wide diet of dividend-producing products in a portfolio. Some fantastic options include the SmartETFs Dividend Builder ETF (DIVS), which offers exposure to small cap U.S. stocks with robust dividend yields. A recent ETF of the week, DIVS is great option for both long-term growth and strong fundamentals.
The SmartETFs Smart Transportation and Technology ETF (MOTO) focuses on transportation technologies, including electric vehicles, self-driving cars, and companies that are building the infrastructure of the world to come. Top holdings include Tesla Inc and Samsung — companies that are likely to reap enormous benefits from Biden’s upcoming infrastructure bill.
Additionally, the Global X SuperDividend ETF (SDIV) offers exposure to a wide array of dividend-paying equities. Its scope is global, a unique strategy that gives this fund a great deal of tactical diversity. The ETF can be used as a core holding or for a short-term tilt toward specific equity groups. The fund boasts a 7.41% dividend yield.
From a commodities approach, another ETF to consider is the iShares S&P GSCI Commodity-Indexed Trust (GSG). This ETF technically offers broad commodity exposure, but the underlying index is tilted heavily towards energy resources. Crude oil, natural gas, and other energy commodities make up close to 70% of the exposure, meaning that metals and livestock are under-represented in this products. GSG is essentially a cross between a pure energy ETF such as DBE and a more broad-based commodity fund such as DBC or USCI.
Finally, the FlexShares iBoxx 3-Year Target Duration TIPS Index Fund (TDTT) is a bond fund that could offer inflation protection on a more targeted basis.
TDTT seeks to provide investment results that correspond generally to the price and yield performance of the iBoxx 3-Year Target Duration TIPS Index. The underlying index reflects the performance of a selection of inflation-protected public obligations of the U.S. treasury, commonly known as “TIPS,” with a targeted average modified adjusted duration, as defined by the index provider, of approximately three years.
According to a FlexShares Fund Focus report, the fund “allocates the majority of its exposure to a core group of five issues with durations closest to its target of three years. The index typically holds between 10 and 15 issues and is rebalanced monthly to maintain that target duration.”
For more market trends, visit ETF Trends.