The economic headwinds following the effects of Covid-19 and the Russian invasion of Ukraine plunged in the world into a damaging phase of sky-high inflation, but commodity based ETFs were some of the most successful funds over this time.
Philippe Ferreira, the deputy head of economics and cross-asset strategy at Kepler Cheuvreux, says: “In a high inflation environment, commodities such as GSG US Equity did very well in 2022 because inflation was inflated by the commodity shock related to the Ukraine and Russia war.
“This also backs the idea that commodities are an inflation hedge, as long as inflation is related to a commodity supply shock.
“Subsequently, starting in late 2022, Equity ETFs have managed to outperform and US Equity ETFs in particular such as SPY US Equity and QQQ US Equity, as investors were reassured by the fact that inflation and rate hikes were not leading to a recession.
“This also backs the idea that, provided there is no recession, equities remain an inflation edge.”
Data complied by Trackinsight revealed some of the ETF funds that have cleared the hurdles of high inflation.
For example, the SPDR S&P500 ETF Trust and the iShares Core S&P 500 between 31 August, 2021 and the same date for this year, were deemed to have a not significant reaction in terms of factor sensitivity, size and volume.
Yet the era of high prices for now appears to be over as inflation is falling, with the latest annual inflation figures from the UK for September showing that inflation fell to a surprising 1.7 per cent, below the government’s 2 per cent target.
Across the European Union annual inflation declined to 2.1 per cent in September, compared to 4.9 per cent for the same period a year ago.
While in the US annual prices are growing at 2.4 per cent in the year to September, steadily falling from this year’s peak of 3.5 per cent found in March.
The latest World Economic Outlook report released by the International Monetary Fund, revealed that global headline inflation will to 5.8 per cent this year falling to 4.3 per cent in 2025.
So how are investment patterns likely to change or stay the same now that inflation is lower and likely to stay lower?
Ferriera reflects: “Now that inflation is lower and central banks have started to cut rates, there is room for bond ETFs to perform better.
“Yet, so far in 2024, investment patterns have not yet changed compared to 2023, equity ETFs and US Equity ETFs in particular keep outperforming.
“Despite the fact that bond ETFs are still struggling in 2024, one of the most noticeable change in investment patterns is the normalisation of yield curves, which were inverted while inflation was high.
“The yield curve is now flat and looks likely to steepen in the coming months.”
Tom Bailey, the head of research at HANetf, says: “Commodities in general tend to perform better in high inflation environments.
“But I would point to Midstream energy sector as particularly well positioned for an inflationary environment.
“ETFs covering this sector are able to provide exposure to both real asset and energy, both areas favourable in an inflationary environment.
“Additionally, midstream energy firms have contracts that are often indexed to inflation.”
Looking ahead, the escalating conflict in the Middle East could cause oil prices increase, leading to a greater risk of inflationary conditions.
Bailey explains: “The world’s major economies have made significant progress in bringing down the inflation spikes experienced in 2021 and 2022.
“An oil price spike on the back of a wider war in the Middle East does have the potential to derail this. But this depends on scope and scale, something that is very hard to predict.
“If we see a prolonged war among or within oil producing states, that could prove inflationary as it would potentially mean output reduced for longer.”
