The past year has offered a stern test for investments considered to be strong inflation-fighters.
Last summer, I asked seven exchange-traded fund companies to highlight what they considered to be their best ETF for investors seeking inflation protection. An early April check-in finds some big winners, some modest results and some misses.
The last normal year of inflation was March 2021, when the cost of living increased 2.2 per cent. Since then, the inflation rate steadily increased to 6.7 per cent in March. We haven’t seen inflation like this since the mid-1990s, which means an ideal laboratory for measuring the effectiveness of various assets in protecting against inflation.
Here are the seven ETFs that were highlighted, with three- and 12-month total returns to March 31.
-BMO Equal Weight Oil & Gas Index ETF (ZEO-T): The clear winner here, and it’s not even close. Up 71.6 per cent in the past 12 months and 30.4 per cent in the past three months. A lot of this gain has to do with a spike higher in oil prices following Russia’s invasion of Ukraine.
-iShares S&P/TSX Global Base Metals Index ETF (XBM-T): Commodity exposure produced another strong showing, with a 12-month gain of 50.6 per cent and a three-month increase of 28 per cent.
-CI Gold Bullion Fund C$ Hedged Series (VALT-T): Gold’s a traditional inflation hedge and it delivered reasonably well. Up 14.3 per cent in the past year and 6.7 per cent in the past three months.
-Invesco Nasdaq 100 Index ETF – CAD hedged (QQC-F-T): The thinking here was that stocks are a good place to be in inflationary times, and the Nasdaq 100 is home to some of the most innovative and disruptive companies. The tech-heavy Nasdaq 100 was up almost 14 per cent for the past 12 months, but a reversal has taken it down close to 9 per cent in the past three months.
-Mackenzie US TIPS Index ETF CAD-Hedged (QTIP-NE): U.S. government-issued Treasury inflation-protected securities (TIPS) seem a natural inflation-fighter, but the results thus far have been inconsistent. The 12-month gain is 4.9 per cent, while the three-month result is a loss of 2.5 per cent.
-Horizons Active Preferred Share ETF (HPR-T): The 12-month gain to March 31 was 8.9 per cent, but the three-month result is a loss of 2.7 per cent. Most preferred shares these days have dividends that get reset every five years so that the yield reflects increases or decreases in bond yields. Investors don’t seem satisfied with that level of protection against rising rates.
-Vanguard Balanced ETF Portfolio (VBAL-T): The 40 per cent weighting in the broad bond market resulted in a 12-month gain of 3.4 per cent and a three-month loss of 4.8 per cent. This turnaround reflects a sharp decline in the bond market lately in response to inflation and the outlook for rising rates.
One more thought for protection from inflation, or at least the kind of inflation we’re seeing right now, is to invest directly in the S&P/TSX Composite Index or other broad Canadian equity ETF. The S&P/TSX Composite, with ample exposure to oil, metals and gold, delivered a total return of 20 per cent in the year to March 31 and almost 4 per cent in the previous three months.
-- Rob Carrick, personal finance columnist
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Ask Globe Investor
Answer: There are none with exactly the same parameters as RYT but there are some Canadian high-tech options to consider – some good, some questionable.
There’s the iShares S&P/TSX Capped Information Technology Index ETF (XIT-T) but it only invests in Canadian tech stocks and is hugely overweighted to Shopify Inc. (almost 29 per cent of the portfolio) and Constellation Software Inc..
The BMO Covered Call Technology ETF (ZWT-T) does hold U.S. stocks but it’s barely a year old so we don’t have any history with which to work. As well, the covered call aspect enhances distributions but limits capital gains. BMO also has a series of innovation ETFs, but these are very specialized.
The CI Tech Giants Covered Call ETF (TXF-T) operates in much the same way as ZWT but has a longer history. Most of the portfolio (92%) is in U.S. stocks. The fund was launched in October 2011 and has an average annual gain of 15.4% since inception.
The Harvest Tech Achievers Growth and Income ETF (HTA-T) invests in 20 large cap tech stocks including Apple, Alphabet, and Microsoft. It also employs a covered call strategy. The fund was launched in 2015 and has generated an average annual return of 16.4% since inception.
I do not recommend the iShares entry because of its heavy overweighting in just two stocks. The three covered call tech funds are worth a look but remember the covered call strategy will limit capital gains.
--Gordon Pape (Send questions to email@example.com and write Globe Question in the subject line.)
What’s up in the days ahead
The big names in Canadian pipelines report their first-quarter results in the next couple of weeks. These were solid performers when oil was down, because they didn’t have direct exposure to commodity prices. But are they any better investments as oil prices rise? David Berman will share his thoughts.
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Compiled by Globe Investor Staff