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Playing Inflation: ETF Strategies for Chasing Market Swings

Brendan Mcdermid | Reuters

To ride out bear market volatility and continued uncertainty from the Federal Reserve, investors are attempting to utilize inflation for potential profit.

Beyond traditional strategies using solely Treasury securities, more exchange-traded funds have entered the market for investors to chase the inflation trade.

"Not surprisingly, in the first half this was an incredible performer," Ben Slavin, global head of ETFs at BNY Mellon, told CNBC's Bob Pisani in an interview Monday on "ETF Edge."

"But there are other products that are coming on to the market that issuers are trying to really gain investor interest in to really provide these different ways to play," he added.

Slavin highlighted the Direxion Breakfast Commodities Strategy ETF (BRKY) as one of those new products. As its name implies, the fund is designed to provide exposure to commodities that can be found on your breakfast table – including coffee, sugar, wheat and orange juice.

Another player in the inflation trade is the Simplify Interest Rate Hedge ETF (PFIX). The fund seeks to hedge interest rate movements arising from rising long-term rates, and to benefit from market stress when fixed income volatility increases, while providing the potential for income.

"I think the longer-term play, and something we're going to see more of, is interest in the fixed income ETFs," Slavin said. "Specifically, in the actively managed space."

Chasing the inflation trade isn't a recent strategy – the U.S. Treasury began issuing Treasury inflation-protected securities, or TIPS, in 1997 as a security to provide protection against price swings. The principal increases with inflation and decreases with deflation, according to the Treasury.

"Inflation is not just a U.S. story, so TIPS are a set product," Andrew McOrmond, managing director at WallachBeth Capital, said in the same interview.

TIPS have close to $19 billion in assets under management with plenty of liquidity, he said, but inflows have slowed down slightly. And Slevin noted that PFIX has been outperforming TIPS since it launched in May 2021.

PFIX uses size and scale to hedge using over-the-counter derivatives that mirror long-term Treasury hedges. The ETF normally invests in Treasurys or TIPS directly, or through other exchange-traded funds.

"They're more efficient," McOrmond said. "Makes the product more efficient and makes them charge a little bit less. It's not the same story as it was."

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