It certainly seems like the threat of inflation won’t be going away any time soon.
On Wednesday, June 10, the CPI numbers for May came out, showing that the index rose 0.5% for the month. This puts the annual inflation rate at 4.2%, which is roughly in line with analyst expectations. Of course, these expectations are coming in part due to the current state of energy prices.
Key Takeaways:
- The May CPI report has finally released, showing that the annual inflation rate is above 4% for the first time in three years.
- While inflation is certainly a risk, corporate earnings remain robust, encouraging advisors and investors to remain engaged with indexes like the S&P 500.
- The flexibility of the ETF wrapper enables plenty of strategies for accessing market upside and downside protection within the same fund, such as through SPLV, BALT, or CPSL.
That being said, the rate of inflation is now past 4% for the first time in three years. Just because the annual rate was expected doesn’t make it any less of a problem.
Stocks With Downside Protection
The persistent nature of inflation is making manners rather difficult for advisors and investors at the moment. After all, rising inflation usually encourages one to batten down the hatches and pivot a portfolio towards defense. However, many large-cap companies within the S&P 500 are still posting strong earnings, which supports the case for sticking with the stock market for now.
As such, it could be a good move to opt for S&P 500 exposure that offers the advantages of downside protection. Fortunately, there are plenty of ways to accomplish this through the adaptable nature of the ETF wrapper.
See More: S&P 500 Momentum Continued Its Dominant Run in May
For example, one could opt to invest in large-cap stocks through an ETF with a low volatility strategy. As an example, take a look at the Invesco S&P 500 Low Volatility ETF (SPLV).
True to its name, SPLV focuses on investing in the companies within the S&P 500 that may have the lowest volatility. To do so, the fund employs the S&P 500 Low Volatility Index. This index tracks the 100 companies within the S&P 500 that have seen the least realized volatility across the last 12 months.
It goes without saying that an approach like SPLV’s could prove to be very fortuitous in an inflationary environment. Companies with lower volatility are prone to possess stronger fundamentals, stable cash flows, and more, and could be positioned in more defensive sectors.
Buffered S&P 500 Plays
A low volatility ETF isn’t the only strategy that could pay off in an era of inflation. Advisors may want to take a look at buffer ETFs — funds that limit downside risk exposure across a set outcome period.
The Innovator Defined Wealth Shield ETF (BALT) is a good example of a buffer strategy in motion. BALT looks to provide similar returns to that of the SPDR S&P 500 ETF Trust (SPY), up to a predetermined upside cap.
Crucially, BALT gives this access to SPY alongside noticeable risk management benefits. Across the fund’s three-month outcome period, BALT seeks to provide a 20% buffer against potential losses. This barrier can help limit the impact inflationary volatility has on portfolios.
See More: Markets in Mayhem: How to Safely Stick With the S&P 500
Laddered Funds for Equity Investing
There are also plenty of other ETFs on the market that provide a distinct focus on downside protection. For instance, there’s the Calamos Laddered S&P 500 Structured Alt Protection ETF (CPSL).
A laddered fund from Calamos Investments, CPSL provides focused exposure towards a portfolio of underlying Calamos Structured Protection ETFs. These underlying ETFs each use options strategies to foster capped exposure to the S&P 500.
In terms of downside security, the ETFs in CPSL’s laddered portfolio provide complete downside protection across a one-year outcome period, following fees and expenses. This significant risk management, amplified by the perks of a laddered portfolio, gives CPSL potent potential for navigating the perils of inflation.
All in all, SPLV, BALT, and CPSL showcase three distinct ways that the ETF wrapper can help advisors and investors stick with the S&P 500 without being overly exposed to the risk of inflation. These funds, among many others, give the investment community plenty of tools to further pursue their portfolio objectives while navigating around undue risk. And with inflationary pressures unlikely to abate any time soon, the use case for these funds may only grow more potent in the months to come.
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