Inflation Hasn’t Cooled Yet – Client Portfolios May Need an Inflation Hedge
While the latest inflation report showed consumer price gains modestly eased in February, we believe it’s still too early to leave client portfolios without an inflation hedge.
While consumer price gains eased on a 12-month basis, increasing 6% in February from 6.4% in January, the one-month change in core prices paints a less rosy picture.
Core inflation, which excludes food and energy, is commonly used as a predictor of future inflation. Core inflation accelerated in February, rising 0.5% from a month earlier, after increasing 0.4% in January -- meaning that the three-month annualized rate is 5.2%, the fastest pace since October.
The Fed has said it is closely watching core services, excluding housing, which also accelerated in February, climbing 0.5% during the month. The index for shelter was the largest contributor toa the monthly all-items increase, accounting for over 70% of the increase.
As recent economic data releases continue to point to signs of sticky inflation, we believe advisors should make sure client portfolios are armed with an inflation hedge. The Harbor Commodity All-Weather Strategy ETF (HGER) aims to provide investors with an inflation hedge through exposure to the Quantix Commodities Index (QCI), which is made up of liquid commodity futures, weighted towards the goal of maximizing the correlation to inflation.
HGER’s underlying index — the QCI — is a dynamic commodity index with the objective of being a diversified inflation hedge for investors. The index places more weight on those commodities that have higher pass-through costs to inflation, such as gasoline, and a lower weighting to those with lower pass-through costs, such as cotton or cocoa.
The QCI also includes a scarcity debasement indicator to indicate what the source of inflation is; in a debasement regime, where inflation is coming from a weaker USD, the QCI tends to tilt toward gold, and in a scarcity regime, where inflation is coming from demand outstripping supply, the QCI will tilt toward consumable commodities such as oil.
HGER is designed to react to shifting environments, reducing the risk of being in a situation in which the futures price of a commodity is higher than the spot price.
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All investments involve risk including the possible loss of principal. Please refer to the Fund’s prospectus for additional risks. For current performance, fees, and important information: HGER
There is no guarantee that the investment objective of the Fund will be achieved. Stock markets are volatile and equity values can decline significantly in response to adverse issuer, political, regulatory, market and economic conditions. A non-diversified Fund may invest a greater percentage of its assets in securities of a single issuer, and/or invest in a relatively small number of issuers, it is more susceptible to risks associated with a single economic, political or regulatory occurrence than a more diversified portfolio.
Commodity Risk: The Fund has exposure to commodities through its and/or the Subsidiary’s investments in commodity-linked derivative instruments. Authorized Participant Concentration/Trading Risk: Only authorized participants (“APs”) may engage in creation or redemption transactions directly with the Fund. Commodity-Linked Derivatives Risk: The Fund’s investments in commodity-linked derivative instruments (either directly or through the Subsidiary) and the tracking of an Index comprised of commodity futures may subject the Fund to significantly greater volatility than investments in traditional securities.
The Quantix Commodities Index is calculated on a total return basis, which combines the returns of the futures contracts with the returns on cash collateral invested in 13-week U.S. Treasury Bills. This unmanaged index does not reflect fees and expenses and is not available for direct investment. The Quantix Commodities Index was developed by Quantix Commodities LP and is owned by Quantix Commodities Indices LLC.
Correlation is a statistic that measures the degree to which two variables move in relation to each other.
Debasement refers to lowering the value of a currency.
Quantix Commodities, LP is the subadvisor for the Harbor Commodity All-Weather Strategy ETF (HGER).
This article was prepared as Harbor Funds paid sponsorship with VettaFI.
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