Exchange-traded fund investors are picking their spots in the market as inflation concerns rise, one trend watcher said.
Though ETF inflows and outflows have largely plateaued in recent months, sector shifts underneath the surface tell a different story, ETF Action founding partner Mike Akins told CNBC's "ETF Edge" on Monday.
"You can see big shifts out of technology, [communications] services, into energy, into financials," he said.
"Right now, energy is the most overweight relative to the S&P 500" at 11% of the $600 billion U.S. sector ETF market, Akins said.
One ETF feeling the heat is WisdomTree's Enhanced Commodity Strategy ETF (GCC).
Commodity ETFs on the whole are benefiting from backwardation, or when front-month futures prices are higher than those further on the curve, making it profitable to roll futures contracts over, Akins said.
"I think we'll see continued flows into this space and rightfully so, in our opinion at ETF Action," he said.
The top 2022 performer of WisdomTree's 75 ETFs, GCC is being used as an inflation hedge, Jeremy Schwartz, global head of research and executive vice president at WisdomTree Asset Management, said in the same interview.
"Bonds don't provide as much diversification as they used to," Schwartz said. "There is this fear of inflation. Rates are heading up from the Fed. What do you do for a standard 60-40 portfolio allocation? Commodities and inflation-sensitive places are one of those diversifiers."
GCC is up just over 9% year to date. The fund holds a mix of energy, agriculture and metals futures contracts and can own up to 5% in bitcoin futures contracts.
Another firm is taking a hybrid approach in addressing inflation concerns.
Amplify ETFs' recently launched Inflation Fighter ETF (IWIN) is a mix of inflation-sensitive stocks and commodity futures contracts, the firm's founder and CEO, Christian Magoon, said in the same "ETF Edge" interview.
Up just over 3% since launch, the ETF has exposure to mining companies, land developers, homebuilders and real estate investment trusts as well as agriculture, gold and bitcoin.
"We wanted to create a diversified basket where you could own a percentage of your portfolio to fight against inflation and hedge, not necessarily take the full bet on commodities and backwardation and contango, but at the same time not ignore the equity space because many of those companies are quite sensitive to inflation if you get that selection right," Magoon said.
IWIN's top five holdings are the Grayscale Bitcoin Trust (GBTC), the SPDR Gold MiniShares Trust (GLDM), Invesco's Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC), the Teucrium Corn Fund (CORN) and real estate company Rayonier.
Dividend-based strategies are attracting interest from investors as well, WisdomTree's Schwartz said.
The WisdomTree U.S. Quality Dividend Growth Fund (DGRW) now has $7 billion in assets backing its forward-looking strategy, which uses quality metrics, return on equity data, return on assets data and earnings growth expectations to determine which companies are likeliest to keep raising their dividends.
"It's a very interesting combination today," Schwartz said. "It's been one of the best performers in the large blend category the last three months because of that defensive rotation. It's top 2% of all large blend funds because of that dividend screen, but good-quality earnings that are supporting that dividend."
Specialty ETFs that mix allocation strategies are also gaining steam, Schwartz said.
His firm's U.S. Efficient Core Fund (NTSX) is approaching $1 billion in assets by offering an actively managed portfolio of U.S. equities and Treasury futures contracts in a leveraged version of the classic 60% stock, 40% bond structure.
"This was a product of the people born on Twitter," Schwartz said. "The idea is getting more for your money. ... For every dollar, you really get $1.50 of exposure, 90 cents of equities and 60 cents of bond futures."
The idea is to devote two-thirds of your capital to NTSX's 60-40-inspired strategy and use the remaining third for diversification and hedging against market risk, Schwartz said.
NTSX is up nearly 67% since its 2018 launch. WisdomTree debuted international and emerging markets versions of the strategy, NTSI and NTSE, in May 2021.
For those who don't want to own fixed-rate bonds in an uncertain environment, WisdomTree's Floating Rate Treasury Fund (USFR) offers another alternative solution.
Floating-rate Treasurys have the shortest duration of any Treasury securities. First issued by the government in 2014, their rates reset every week instead of being fixed.
"The Fed has communicated they're on a path to hiking rates," Schwartz said. "During the last rate hike cycle, the floating rate Treasury was the highest-yielding Treasury by the end of the cycle. Our view is that's going to happen again. So USFR is the way to play the Fed rate hike."
Another Amplify offering aims to strike a balance between risk-off and risk-on assets in case of unpredictable, "black swan" market events.
"What this allows you to do is get about anywhere from 50%-70% of the return of the relative index, whether that's the Nasdaq or the S&P, but have considerable always-on hedged exposure to the market," Amplify's Magoon said.
It's useful in times like the early Covid pandemic stock market collapse, Magoon added. When the S&P dropped 30% over the course of a few days, SWAN fell just 9%.
"When market volatility increases, when there is a geopolitical event, investors go risk-off, they focus on U.S. Treasurys," Magoon said. "Treasurys that have a negative correlation to the equity market can be an important part of a hedged portfolio exposure should we see disruptive events or black swan events."