What ETFs investors should look to as an inflation hedge

Tom Lydon, ETF Trends CEO, joins Yahoo Finance Live to discuss inflation concerns and opportunities in small cap sector.

Video Transcript

KRISTIN MYERS: All right, time now for our ETF report brought to you by Invesco QQQ. We're joined now by Tom Lydon, CEO of ETF Trends. Tom, always great to have you with us. So many things going on in the market right now, I'm going to start with this.

A lot of folks have been telling us about looking at cyclicals going forward. There's been a lot being made about the value versus growth debate, taking the barbell approach. How should investors be approaching it right now, especially as they're looking to add more ETFs to their portfolios?

TOM LYDON: Yeah, great point, Kristin, good seeing you too. Yeah, when you look year-to-date, we've started to see some major shifts going on where really, coming out of the financial crisis if you bought the S&P 500, it really would have been tough to beat. But in the last year, areas like value stocks have started to perform really well.

If you look at small caps, as well, where they've been really crushed by large caps in the last 10 years, and there's some big ETFs to consider. Specifically one I like is the iShares US Small Cap Value Factor ETF, so you're getting both value plus small cap wrapped into one ticker symbol SVAL-- S-V-A-L-- up 30% year-to-date. So this trend is real.

And a little bit of the fundamentals behind it, not only the price is right as far as a valuation PE ratio, but when you think about the reopening trade, these small companies have the ability to turn on a dime and ramp up really quickly. And many of them have. So as you look at your portfolios today, and we know most Americans across the US have a very high correlation to the S&P 500, they love the mega cap stocks, the FANG stocks that-- where a lot of the engine that gave them that boost over the last 10 years, now is the time to start thinking about diversifying into small cap, into value, and especially opportunities overseas.

ALEXIS CHRISTOFOROUS: And Tom, how-- how are you thinking about inflation and the rising inflation concerns we're seeing? I mean, yesterday Treasury Secretary Janet Yellen came out and said, you know, interest rates might have to rise sooner rather than later so that we can get ahead of inflation. Sort of sounded like her old days as head of the Federal Reserve. And you've got all these different sorts of commodities from lumber prices to precious metals moving higher. So what are you seeing investors doing to-- to hedge that?

TOM LYDON: Yeah, well, you know, the Fed's been signaling that they're not really concerned. I think you and I are concerned. We're seeing it at the pump. We're seeing it at the grocery store. We're seeing it in lumber prices, as you say. And base commodities like copper, and steel, and gas prices are going up.

The funny thing is the only thing that really isn't moving is gold. And maybe the-- the bloom is off the rose for gold as many people are looking at cryptocurrencies. But inflation is real, and we're feeling it. And for the first time in a long time, there's some opportunities there.

One ETF I really like is the Invesco Optimum Yield Diversified Commodity ETF, which is PDBC. It's up 22% year-to-date. But it's a good cross-section of 12 different commodities wrapped into one ETF, and you don't have to worry about getting a K-1. The tax treatment's a little bit more favorable there. So that's something to think about.

The other thing that's a little bit more creative is KraneShares has a Global Carbon ETF KRBN. When you think about factories, when you think about more cars on the road, carbon credits are going to be really important. And the prices are going through the roof. So here's a way to-- if you feel that the world in general will be opening up, it's-- it's a way to kind of hedge that, where you're not excited about carbon in the atmosphere, but if you feel that the world will continue to open up, here's an opportunity for you in the form of an ETF.

KRISTIN MYERS: Tom, I want to ask you about something that was mentioned a little bit earlier in the last hour by Brent Schutte as we were talking about the economy is you're talking about really heating up. We had some comments yesterday from Treasury Secretary Janet Yellen about needing to hedge against these potential moves going forward, especially with the Fed possibly needing to pivot perhaps a little bit sooner than they've been indicating. How should investors start approaching that?

TOM LYDON: Well, what I really feel for are retired investors or those that are-- even have a balanced portfolio. You know, a lot of the people in the financial advisor community are saying of that 60-40 allocation, that 40 allocation of fixed income is terminal for an extended period of time. So what's happened is we've seen fixed income investors barbelling their investments. We've got $5 trillion in money market funds, which is almost like a record high.

And if you look at the Barclays Ag, which has really been the pillar for fixed income investors for an extended period of time, it's not a great investment if you're threatened by rising interest rates, especially with rates being so low. So a lot of folks are saying, it's not worth the risk. I'm not going to play the game. I'm going to take my marbles and go home and either camp out in money market funds or look to alternative yield strategies, areas like real estate, areas like dividend-producing stocks or ETFs.

MLPs, for example, offer, for a small allocation, pretty sizable yield. So I think we're going to continue to see more of that. And where ETF measurement last year was won by fixed income, it's only a fraction of what we've seen going into equity ETFs so far this year. So people are speaking with their feet. And you can see by the flows that there's a lot of concern on the fixed income side.

KRISTIN MYERS: All right, ETF Trends CEO Tom Lydon, always great to have you join us.