Hedge Against Inflation with Basic Materials

Jim Woods

Jim Woods has over 20 years of experience in the markets from working as a stockbroker, financial journalist, and money manager.
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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.

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