Endless demand to protect portfolios from rising prices is fueling an indiscriminate boom in one corner of the $7.2 trillion U.S. exchange-traded funds market.
Every ETF with the word "inflation" in either its name or description has posted inflows so far this year, according to data compiled by Bloomberg — a rare degree of one-way conviction among the investing masses.
The 18 products, spanning asset classes and with strategies designed to outperform when prices rise, have so far lured $35.5 billion in new cash, the data show. That equates to 37% of their assets, making their organic growth rate more than three times faster than the industry overall.
It's another illustration of how fear of inflation and rising interest rates is tightening its grip on the investment world. Federal Reserve officials have maintained for months that price pressures can be chalked up to transitory factors. Yet the worries run deep amid supply chain snarls, commodity pressures and labor market challenges.
Short-term inflation expectations among U.S. consumers are at an all-time high, while yields on 30-year Treasury inflation-protected securities hit a record low Monday as investors sought shelter.
"Most people see inflation with their own eyes in their lives and don't buy the transitory line from the Fed," said Eric Balchunas, senior ETF analyst for Bloomberg Intelligence. "If you look on the bond side, TIPS funds are among the best performers in a not-great year for bonds."
The $37 billion iShares TIPS Bond ETF is at the top of the flow leaderboard with a nearly $10 billion haul so far — on course for a record year. It has returned 5.6% in 2021. All but four of the 18 "inflation" ETFs have delivered positive returns.
At the same time, some of the U.S. funds most vulnerable to rising prices and rates are bleeding cash. The $39 billion iShares iBoxx $ Investment Grade Corporate Bond ETF has shed nearly $15 billion, more than any other ETF, as it returned -0.7%.
Citigroup strategists, led by Scott Chronert, argue that while inflation should continue to climb over the next few months, the trend will likely peak in February as the Fed tapers asset purchases and kinks in the supply chain work themselves out. As such, investors should start positioning for the decline, they wrote.
But financial advisers managing through the current environment likely aren't thinking that way, according to Dave Nadig, CIO and director of research, at data provider ETF Trends.
"Transitory or not, it's real, it's in advisers' faces, and there aren't a lot of great alternatives available for them to solving the inflation conundrum," Mr. Nadig said. "Inflation management is really not about growth or investing, it's just about preserving buying power."