Exchange Traded Funds (ETFs)

Hedge Against Inflation with Basic Materials

I recently have been exploring several exchange-traded funds (ETFs) that might be useful hedges against inflation, which could rear its head in the days to come.

One option for investors looking to protect the value of their money is Invesco DWA Basic Materials Momentum ETF (PYZ). This fund combines a sector-based approach to investing in basic materials companies with the momentum thesis – that is, the idea that stocks that have recently gone up are likely to continue to go up.

The fund invests in U.S.-based companies that are involved in raw materials production, including wood, paper and agriculture, as well as mining and other industries. Of those companies, PYZ selects 30 or more stocks — most recently, it held exactly 30 — with relatively strong price momentum according to a relative strength index. This also is used to determine the weighting of positions within its portfolio. Holdings and weights are determined on a quarterly basis.

The stocks in this fund currently are on the larger side, and are not very volatile, at least based on its most recent quarterly rebalancing. As the chart below shows, PYZ has shown strong performance in the last 12 months, moving practically straight “up and to the right.”

Chart courtesy of StockCharts.com

The fund is up more than 85% over that period, with a gain of 25% this year alone. Over both those time periods, it compares favorably with a simpler basic materials strategy, as measured by iShares Basic Materials ETF (IYM). PYZ has net assets totaling $114 million, a yield of 0.73% and has an expense ratio of 0.60%.

The top five holdings of this fund currently are Steel Dynamics (STLD), 4.65%; U.S. Steel (X), 4.18%; Freeport-McMoRan (FCX), 4.16%; Olin Corp. (OLN), 4.07%; and Avery Dennison Corp. (AVY), 4.07%. The top 10 holdings make up 40.71% of total assets.

Commodity-based companies have long been considered one path to hedging against inflation. For investors who believe in that strategy, as well as the time-tested concept of stock momentum, Invesco DWA Basic Materials Momentum ETF (PYZ) may provide a useful investing tool.

As always, I am happy to answer any of your questions about ETFs, so do not hesitate to send me an email. You just may see your question answered in a future ETF Talk.

Jim Woods

Jim Woods is a 20-plus-year veteran of the markets with varied experience as a broker, hedge fund trader, financial writer, author and newsletter editor. Jim is the editor of Intelligence Report, Investing Edge, the Bullseye Stock Trader, and The Deep Woods (formerly the Weekly ETF Report). His books include co-authoring, “Billion Dollar Green: Profit from the Eco Revolution,” and “The Wealth Shield: How to Invest and Protect Your Money from Another Stock Market Crash, Financial Crisis or Global Economic Collapse.” He’s also ghostwritten many books and articles, as well as edited content for some of the investment industry’s biggest luminaries. His articles have appeared on many leading financial websites, including StockInvestor.com, InvestorPlace.com, Main Street Investor, MarketWatch, Street Authority, Human Events and many others. Jim formerly worked with Investor’s Business Daily founder William J. O’Neil, helping to author training courses in the CANSLIM stock-picking methodology. The independent firm TipRanks rates Jim the No. 3 financial blogger in the world (out of more than 6,000). TipRanks calculates that, since 2012, he's made 361 successful recommendations out of 499 total, earning a success rate of 72% and a +15.3% average return per recommendation. He is known in professional and personal circles as “The Renaissance Man,” because his expertise includes such varied fields as composing and performing music; Western horsemanship, combat marksmanship, martial arts, auto racing and bodybuilding. Jim holds a BA in philosophy from the University of California, Los Angeles, and is a former U.S. Army paratrooper. A self-described “radical for capitalism,” he celebrates the virtue of making money from his Southern California horse ranch.