Inflation will again dominate as a market theme this year, according to two ETF experts.
"This is going to be a big story in 2022," Tom Lydon, CEO of ETF Trends, told CNBC's "ETF Edge" on Monday.
What's more, increasing prices and a Federal Reserve ready to raise rates in response could spell trouble for the fixed income market – longer-term bonds typically fall when interest rates are on the rise.
"Most don't remember what it's like to invest in fixed income during rising interest rates. It's just not good for a fixed income portfolio. We're surveying advisors all the time that are moving their 60-40 strategies to 70-30 or even 80-20," Lydon said, referring to the general portfolio rule of thumb of being weighted 60% to equities and 40% to fixed income.
Instead of money flowing into bond ETFs, for example, Lydon says investors are instead looking to equity dividends or options overlay strategies such as the JEPI JPMorgan equity premium income ETF. That JEPI ETF has risen more than 12% in the past 12 months, while traditional bonds ETFs such as the AGG core U.S. aggregate bond ETF and the BND total bond market ETF have fallen.
"I think we're going to see more of those types of strategies come to the surface," said Lydon.
Astoria Portfolio Advisors chief investment officer John Davi has developed one way to hedge against inflation should prices continue to rise even with the Fed tightening monetary policy. At the end of 2021, the firm launched the PPI AXS Astoria inflation sensitive ETF.
"Going back a year, a year and a half ago, I was on CNBC and I said, 'Look, I think rates are rising, inflation is rising… We've got seven ETFs that we're trying to use to cobble together an inflation theme. Let's look at a potential ETF that provides a one-ticker solution that gives you broad market exposure to not only cyclical stocks which benefit from rising inflation, but also physical commodities, commodity equities, and TIPS.' "
His ETF is weighted 70% to 80% toward cyclical stocks, 10% to 15% in commodities, and 5% to 10% in TIPS. Top holdings include Western Alliance Bancorp, Regions Financial, Zions Bancorporation and Devon Energy.
"You should embrace [inflation] and then look for strategies that benefit so the ETF has the four sectors are industrials, energy, materials and banks. Those sectors historically have had the most sensitivity to rising inflation," Davi said.
The PPI ETF has risen nearly 4% this week. By comparison, the S&P 500 has fallen more than 1%.
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Correction: Inflation is expected to be a major theme in 2022. The year was misstated in a headline on an earlier version of this article.