Canadian Inflation Trends Higher: ETFs to Consider
Canadian inflation took an unexpected turn upward for the month of April. Here are two ways investors can hedge against further increases with ETFs.
The latest data on Canada's main measure of inflation, the Consumer Price Index (CPI) released on May 16th came in hot at a 4.4% year-over-year increase for the month of April. This time, investors digested a rather unpleasant surprise in the form of an uptick in the main measure of inflation, with a monthly increase of 0.7% compared to a 0.5% gain in March.
This print comes after a brief respite earlier in April after the Bank of Canada (BoC) elected to hold the policy interest rate at 4.5%. At the time, the Bank acknowledged that global inflation was lowering, but also noted that core inflation and labour markets remained heated, with demand still exceeding supply and economic growth chugging along.
Despite projections for inflation to fall quickly, the BoC did caution that it would continually review inflation data to moderate its decisions at subsequent meetings. In light of the recent data showing that inflation still remains sticky, many now expect the BoC to reverse course and introduce further rate hikes at its upcoming June 7th meeting.
Here's a look at two Canadian-listed ETFs with inflation-fighting properties investors can consider. To find a list of similar ETFs, investors can use the Cboe ETF Screener and set a filter for "commodities" in the "Asset class" tab.
CI Auspice Broad Commodity Fund (CCOM)
Some investors hedge inflation via an allocation to commodities. This can take the form of energy inputs (oil, natural gas, coal), minerals (copper, aluminum, lithium, uranium), precious metals (gold, silver, platinum), and agricultural products (corn, wheat, soybeans). Commodities can enjoy higher prices when inflation strikes, which offers investors a safe haven and a lower correlation to stocks and bonds.
The problem is gaining exposure. Only some of these commodities can be held physically, such as gold or silver bullion. The others require the use of commodity futures, which many Canadian investors do not have access to. An ETF that solves this while offering broad diversification across multiple commodity types is CCOM, which tracks the Auspice Broad Commodity Excess Return Index.
Currently, CCOM holds around $113 million in assets under management spread across a portfolio of agriculture, energy, and metal commodity futures contracts. Unlike some Canadian listed commodity ETFs, CCOM is broadly diversified and has the ability to manage risk by taking long or flat positions on individual commodity futures. The ETF charges a 0.52% management fee.
Purpose Diversified Real Asset ETF (PRA)
An ETF that blends both equities and commodity futures is PRA, which incorporates a risk-weighted portfolio of different inflation-resistant assets. At present, PRA's portfolio includes a variety of sectors such as agriculture, energy, base metals, precious metals, and real estate. This ETF is managed actively and comes with an expense ratio of 0.99% with around $134 million in AUM.
As noted earlier, the unique aspect of PRA lies in the ETF manager's strategy to not only invest in futures tracking commodities like gasoline, live cattle, crude oil, gold, aluminium, palladium, corn, soybeans, zinc, and platinum but also in the shares of companies that produce these commodities, alongside real estate stocks. As such, the ETF has the potential for long-term capital appreciation.
In PRA's portfolio, each category (agriculture, real estate, energy, base metals, precious metals) is assigned a weight based on risk. In other words, every one of these five categories is designed to contribute equally to the total volatility of the ETF. This ensures a more uniform distribution of risk and returns while minimizing sector-specific risks.
WEBINAR: ECONOMIC OUTLOOK & INFLATION-RELATED INVESTING
Join Cboe Canada on June 5th for a thought-provoking and in-depth discussion with Ben Tal, Managing Director and Deputy Chief Economist at CIBC. We’ll discuss Ben’s macro-economic outlook, his thoughts on inflation and the risk of recession, and insights for investing during times of market volatility. SIGN UP HERE: https://bit.ly/3q6pMsc
Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.
