Fighting Inflation With Equity ETFs

When it comes to fighting inflation, typical destinations for investors include Treasury Inflation Protection Securities (TIPS) and hard assets, such as gold or real estate. Investors can also fight inflation with equities, including cyclical plays from the natural resources segment.

The SPDR S&P North American Natural Resources ETF (NYSE:NANR) is a good place to start. Having debuted in mid-December 2015, NANR is barely more than a year old. Now home to $876.5 million in assets under management, NANR is easily one of the most successful new ETFs to have come to market over the past 14 months.

NANR And The NANR Index

NANR is designed to meet demand for natural resources equity exposure by providing access to companies in the energy, materials and agriculture industries. NANR provides investors with an approach that weights the sub-sectors of the portfolio 45 percent energy, 35 percent materials and 20 percent agriculture stocks, according to a statement from State Street Global Advisors (SSgA).

The SPDR S&P North American Natural Resources ETF follows the S&P BMI North American Natural Resources Index, which is a subset of the S&P Global Large MidCap Commodity and Natural Resources Index, according to SSgA.

Strategy

Historically, shares of natural resources companies have performed well in inflationary environments because earnings are closely linked to the value of the underlying commodity produced by the firm. As such, when inflation erodes the value of the US dollar, the value of the underlying commodity and the firms shares both rise, said State Street Vice President David Mazza in a recent note.

NANR is essentially a materials and energy ETF in disguise with a dash of consumer staples stocks mixed in. The first two sectors are 94 percent of the ETF's weight with staples checking in at 5.9 percent. That positions NANR nicely in a rising rate environment because energy and materials are cyclical groups and cyclical sectors typically perform well as borrowing costs climb.

As has been widely noted, energy is one sector that has the look of a value idea in an aging bull market with precious few value destinations left to explore. Data suggest natural resources names, including some found in NANR, are actually inexpensive relative to long-term averages.

The S&P Global Natural Resources Index is trading below its 10-year average price-to-book value (P/B) ratio. Meanwhile, the S&P 500 Index is trading near a 10-year high and the MSCI World Index is trading above its long-term average, added Mazza.