ETFs to turn to as Fed sets stock market up for rising inflation and interest rates; GameStop heads to IWF

We won’t bore you with the particulars, but the Fed might hike interest rates earlier than expected, penciling in two rate increases in 2023. You can read about what Chairman Jerome Powell said and did here and the market’s reaction here and here and here, and the Fed’s view on interest rates here and on inflation.

But what does all that mean for exchange-traded funds? That’s what we’ll aim to tackle this week.

We will also look at VanEck’s efforts to put a bitcoin in an ETF wrapper. Nobody puts bitcoin in an ETF wrapper, or a corner — yet.

Plus, GameStop Corp. GME, +0.28% is coming to the Russell 1000 index RLG, +1.25%, brace yourself IWF.

Meanwhile, the stock market midday Thursday was under pressure, with the Dow Jones Industrial Average DJIA, -0.62%, and S&P 500 SPX, -0.04% trading lower, and the Nasdaq Composite Index COMP, +0.87% was fighting to retain a modest gain.

As per usual, send tips, or feedback, and find me on Twitter at @mdecambre to tell me what we need to be jumping on. Sign up here for ETF Wrap.

Inflation & Interest rate plays

The Fed’s latest economic projections show that seven Fed officials expect to raise rates by the end of 2022, up from four in March. Thirteen of 18 Fed officials indicate that they expect to lift short-term rates by the end of 2023, up from seven.

Fed officials also expect the U.S. economy to grow 7% in 2021 from 6.5%, according to projections released Wednesday. Policy makers are expecting inflation to rise 3.4% in the fourth quarter from a 2.4% estimate in March. So the Fed’s current estimates are looking to be handily above its 2% annual target.

We chatted with CFRA’s Todd Rosenbluth on ways to play rising interest rates and inflation themes. He called out Quadratic Interest Rate Volatility and Inflation Hedge ETF IVOL, -0.96%, which is going to make Nancy Davis, who launched it back in 2019, pretty jazzed.

Davis is an options guru, and former Goldman Sachs GS, -2.56% trader, who thought a product like actively managed IVOL was a missed opportunity. The ETF is about 85% weighted in Treasury inflation-protected securities, or Treasurys that account for changes in inflation expectations, which are a big problem for assets with fixed assets like government bonds. Much of the rest of IVOL is in fixed-income options that could benefit if long-dated interest rates move higher, for example.

IVOL is flat this year but up 3.2% over the past 12 months.

MarketWatch has spoken with Davis in the past, where she said that she also views IVOL as a hedge against corrections in equity and real estate as the prices of stocks and properties tend to fall during times of increased fixed-income volatility.

IVOL, with $3.5 billion in assets, has an expense ratio of 0.99%, which means the fund will cost $9.90 for every $1,000 invested.

Rosenbluth also pointed to Horizon Kinetics Inflation Beneficiaries ETF INFL, -2.14%, which boasts nearly $600 million in assets and has an expense ratio at 0.85%, and iShares 0-5 Year TIPS Bond ETF STIP, +0.17%, which has $5.5 billion in assets and a 0.05% ratio, as solid inflation plays.

Horizon was launched near the start of the year and is up about 7% over the past three months, while the iShares inflation product is up 1.2% in the year to date and 3.5% over the past 12 months.

There are certainly a ton of other ways to play rising rates and inflation, including buying financials, like SPDR S&P Regional Banking ETF KRE, -5.03%, Financial Select Sector SPDR Fund XLF, -2.96%, Vanguard Financials ETF VFH, -2.92%, which would capitalize on banks benefiting from higher long-term rates, which helps support their business models of borrowing short and lending long.

Fidelity rolls out trio of ETFs

Fidelity recently launched three actively managed ETFs. Fidelity Preferred Securities & Income ETF FPFD, -0.05% on Cboe Global Markets, and Fidelity Sustainability U.S. Equity ETF FSST, -0.25%  and Fidelity Women’s Leadership ETF FDWM, -0.02% both on the Intercontinental Exchange-owned ICE, +0.16% New York Stock Exchange’s Arca platform.

Greg Friedman, Fidelity’s head of ETF management and strategy, told MarketWatch via email that the preferred securities ETF, managed by Adam Kramer and Brian Chang, may offer some benefits to investors seeking more income than traditional fixed-income products.

“Generally, preferred securities offer more income than traditional investment grade bonds and higher quality than high-yield bonds, with less volatility than equities,” he said.

“Just as beneficial, during periods of rising rates, some types of preferred income securities, such as fixed-to-floating rate, are less sensitive to the same negative price pressure that most bonds experience,” Friedman said.

Is there a bitcoin ETF?

No.

But there’s news and it could be interpreted a couple of ways.

The Securities and Exchange Commission on Wednesday delayed a decision on approving a bitcoin ETF from ETF provider VanEck, marking the second time it has done so since April.

The SEC wants to understand whether the proposed VanEck Bitcoin ETF would be susceptible to manipulation, or whether notably its underlying assets would be , and whether any single market participant would have “the ability to buy or sell large amounts of bitcoin without significant market impact,” it said in its announcement.

We reached out the VanEck folks on Wednesday who had this to say: “VanEck continues to believe investors will be well served by having a publicly registered Bitcoin product and we’re committed to working with regulators during their period of consideration.”

One read of the SEC’s move is that it is reluctant to move forward with a bitcoin ETF this year and thinks that not much has changed to alter its concerns on digital assets underpinning an ETF. Another way to think about this statement is that the SEC is methodically attempting to get comfortable with this asset and is hyper concerned about investor protections, which is something that newly minted SEC Chairman Gary Gensler as articulated.

Tell us what you think.

The good and the bad

GameStop won’t stop

GameStop boasts a $16 billion market cap, as of Thursday trade, but it had qualified for entry into a more exclusive club the Russell 1000 index RUI, -0.00% back in May, as per the annual reconstitution overseen by FTSE Russell. The rebalancing by the index provider comes as GameStop shares have soared over 1,000% so far this year, propelled by a meme stock revolution that itself has been powered by individual investors on social -media platforms like Discord and Reddit, who have coordinated to drive stocks higher and crush short sellers.

GameStop, and AMC Entertainment Holdings AMC, +10.06% to an even greater degree, has been a big beneficiary of that trend, which now has implications for ETFs.

The reconstitution means that the iShares Russell 1000 Growth ETF IWF, +1.24%, which aims to mimic the performance of the Russell 2000, will also be required to include GameStop on or before June 25, when the reconstitution will be completed.

The Russell 1000 Growth ETF kicked off more than two decades ago, and is one of the most popular equity ETFs and has about $66 billion in assets.

Visual of the week

Timber! Lumbers prices LB00, -6.51% are still up 150% over the past 12 months but have buckled lately, down roughly 27% so far in May.