The best ETFs and mutual funds are the ones that can withstand inflation

Equity markets experienced increased volatility in May, caught in a standoff between strong corporate earnings reports and higher than expected inflation. At the same time, bond market yields remained remarkably resilient. Despite the poor performance of the market as a whole, some of the best ETFs and mutual funds have generated exceptional returns.


“May has seen one of the strongest quarterly earnings reporting periods I have seen in my 40+ years of experience in the fund management industry,” said Leo Grohowski, Director of Investments at BNY Mellon Wealth Management. “Obviously, we were coming out of a very weak first quarter period in 2020. But having 87% of S&P 500 companies beating earnings expectations was truly an exceptional quarterly reporting period.”

He said it helped offset “the highest rate of inflation we’ve had since 2009. We had the CPI (Consumer Price Index, released in mid-May) report which was much higher. hotter than expected by investors.

The best ETFs and mutual funds have weathered inflation

Overall, US diversified mutual funds gained an average of 0.5%, according to data from Lipper Inc. The 10-year US Treasury yield hovered around 1.6%. The Dow Jones jumped 1.93%, while the Nasdaq was the only major index to post a negative return of 1.44% for the month, reducing its YTD performance to 7%. Since the start of the year, American diversified equity funds have risen sharply by 13.43%. Equity value and income funds were clearly among the best mutual funds in May. Growth equity funds underperformed.

Within sectors, those that can withstand inflation performed the best. Precious metals stocks, natural resources, basic materials and financials were among the best ETFs and mutual funds. Technology, healthcare / biotech, utilities and consumer services funds have lagged behind.

Global equity funds surged an average of 2.34% in May, completing their lead over the current year to 9.63%. Funds in zone India, zone Europe, Latin America and international value jumped 4% to 7% in May. India, the European region and international value funds achieved YTD returns of between 12% and 18%.

A similar picture emerged among some of the best diversified equity ETFs in the United States. Invesco S&P SmallCap value with Momentum (XSVM) holds first place with a cumulative return of 50.1%. The $ 332 million fund jumped 6.45% in May. The main titles include Gamestop (GME), Veritiv (VRTV), United natural foods (UNFI) and Green plains (GPRE) – up between 33% and 1,078% since the start of the year.

Energy and travel ETFs win

Energy ETFs have replaced cannabis ETFs, with Invesco Dynamic Energy Exploration and Production (PXE) up 12.24% in May and 67.7% year-to-date.

“In May (we saw) a re-emergence of larger gains in the travel industry,” said Greg Bassuk, CEO of AXS Investments. “On the other hand, we have seen some large and small caps struggling to the extent that they are in areas that are going to be more difficult as inflation rises.”

For this year, Bassuk believes that a few areas are poised for strong growth. One is infrastructure.

“We believe this is an area on which Congress and the Biden administration will come to an agreement,” he explained. “Companies in the infrastructure sector, in our view, are very well positioned. Both in the short term, in June, due to the announcement of these developments, but especially throughout 2021, as the programs are put in place.”

In addition, sustainable investments such as clean energy, wind and solar are here to stay, he said. Another bullish area for top ETFs and mutual funds is venture capital (VC).

Venture capital is promising

“During the pandemic, all of these venture capital funds took a wait-and-see approach,” he explained. “And now that the economy is reopening, a lot of money is being invested in early stage venture capital firms.”

AXS Thomson Reuters Venture Capital Return Tracker (LDVIX) is the only fund available to retail investors that replicates the performance of the venture capital industry. The $ 279 million fund is up 11.1% year-to-date and charges an annual fee of 1.51% to own it.

Within fixed income securities, the national general taxable funds increased on average by 0.4%. Inflation-protected bond funds were among the best mutual funds, up 1% in May for a cumulative return of 1.61%. Emerging market local debt and hard currency funds rose as the dollar weakened. Global income funds also performed well. All, however, are still in the red for the year.

Michael Fredericks, Managing Director and Head of Income Investments at Black rock (BLACK), expects more volatility over the next three to four months as economic growth and inflation post another good reading. However, he believes some of the growth will fade in the second half of 2021 as stimulus funds are spent.

Inflation could impact the best ETFs and mutual funds

“The big question I’m thinking is, where do you think inflation and growth will be in two years? ” he said. It points to two options: revert to the benign inflation and growth we saw in the years following the global financial crisis, or a world where inflation escalates more persistently.

“Whether we have an inflation rate of 2% or 3%, it makes a big difference,” he noted. “At 2% inflation for 20 years, price levels increase by 50%. But at 3.5% inflation, price levels have doubled in 20 years.”

As a result, he added, it can make a big difference for those nearing retirement: “The combined effect is pretty brutal, especially when the returns available in core fixed income securities are so low.” .

Find ways to employ the best ETFs and mutual funds for retirement in our special report on How to Boost Your Retirement

For the remainder of this year, however, “a key item to watch is the Federal Reserve’s playbook,” he said. While the Fed may be a long way from raising interest rates, it could come close in terms of adjusting the pace of asset purchases.

Where can the best ETFs and mutual funds find higher returns?

Fredericks is also the lead manager of the $ 18 billion BlackRock Multi-Asset Income (BCICX), $ 1.4 billion BlackRock Dynamic High Income (BDHAX) and $ 821 BlackRock Managed Income (BLADX). They are up 4.51%, 6.43% and 2.74% respectively this year.

To compensate for the low returns, he focuses on two areas of the market: equities and low-term fixed income. He also points out that there is a lot of liquidity accumulated in the system which will seek additional return. Due to the positive economic outlook, he is less worried about defaults on lower quality high yield bonds.

Fredericks currently favors floating rate notes, bank loans, non-agency mortgages and certain commercial mortgages. On the equity side, he likes dividend-growing companies because of their strong business models and increasing dividends over time, which should offset inflation.

With an expense ratio of just 0.15%, iShares International Dividend Growth (IGRO) invests in global companies that are used to increasing their dividends. $ 224 million ETF returns 2.3% and counts Nestle (NSRGY), Royal Bank of Canada (RY), Sanofi (SNY) and Unilever (UL) among its main titles.


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