What themes might shape ETF investing throughout the rest of 2022?

ETFs will be essential in a new era marked by high volatility, inflation, and uncertainty, says BlackRock

What themes might shape ETF investing throughout the rest of 2022?

With the end of the Great Moderation – which began in the mid-1980s and was marked by low inflation and steady economic growth – the world has entered a new era of high volatility, inflation, and uncertainty.

And as pandemic scars and geopolitical conflict usher in this new regime, a new note from BlackRock highlights three investment themes that will be crucial for ETF investors to stay focused on for the rest of 2022.


“Central banks are rushing to raise rates to contain inflation that’s rooted in production constraints. They are balancing a stark trade-off: crush economic growth or live with inflation,” said Gargi Chaudhuri, Head of iShares Investment Strategy Americas, in a note running down the firm’s ETF Implementation Ideas for Fall 2022. “We see this driving a new regime of higher macro and market volatility, with short economic cycles.”

While elevated volatility may present some opportunities for investors, BlackRock advised against buying the dip, and encouraged investors to stay invested for the long term. But today’s environment of uncertainty, it added, calls for a defensive stance.

Read more: Volatility comparable to pandemic and 2008 crash, says AGF Investments

“In equities, we favour a factor tilt toward a minimum volatility strategy to reduce overall portfolio risk and to hedge against the significant drawdowns of this year. We also like dividend ETFs, which we see as a potential source of stable income, value and quality in a portfolio,” Chaudhuri said. “Defensive fixed income exposures may provide ballast … We prefer limiting duration as investors have already priced in rate hikes by the Bank of Canada and U.S. Federal Reserve.”

Sustained inflation

Another pivotal theme involves the end of the 40-year trend of steadily declining expectations that occurred in 2020. Citing recent survey data reflecting 14-year highs in longer-term inflation expectations, BlackRock anticipates inflation to be higher and more persistent than it has been previously even as it predicts monetary policy tightening and a slowdown in growth to ease cyclical inflation pressures.

“For all the noise about containing inflation, we see policymakers ultimately living with some of it once the cost on growth and jobs becomes clearer – and is acknowledged,” Chaudhuri said.

Long-term inflation makes inflation-linked bonds preferable to conventional bonds, BlackRock said. And with U.S. Fed rate increases now fully incorporated into the front end of the yield curve, it added, short-term inflation-linked bonds will benefit outright from higher inflation over the medium term versus conventional products.

Read more: What portfolio picks are best for this inflation turning point?

“[W]e like short-term Treasury inflation-protected securities (TIPS),” Chauhardy said, adding that current valuations make TIPS an attractive alternative to government bonds and core fixed income. “In equities, higher inflation and tighter financial conditions would support industries that include more quality companies with pricing power and strong balance sheets.”

The long-term implications of shortages

Finally, BlackRock highlighted how commodity shortages are inducing volatility that hasn’t been seen in decades.

“From gasoline prices to food inflation, it doesn’t take much to see and feel the real economic impact,” Chauhardy said. “There is little in the macroeconomic picture that suggests an easing of commodity shortages, either.”

With rampant fears over recession, slower growth, and higher interest rates impeding the necessary private and public capital investments to ease underlying frictions, BlackRock argued that exposure to “companies that can translate structurally higher commodity prices into profitability” could better capture the trend than outright exposure to commodities.

It underscored energy and agriculture as two subsectors of the commodity complex that are well-positioned to profit from this backdrop. The Russia-Ukraine conflict and a long-term trend away from oil and gas supports higher energy prices for the longer term, BlackRock added, encouraging investment in the net-zero transition as green energy alternatives become more cost competitive.

“Transition essentials like wind turbine farms and electric vehicles also require staggering amounts of iron ore, copper, lithium and other metals to match fossil fuel-generated power sources’ outputs,” Chauhardy said.

“Our shortages theme has positive implications for Canadian stocks and credit given the larger exposure to resources companies than is found in other global benchmarks,” she added. “Investing in high-carbon resource companies that either have credible transition plans or are key to the transition can give investors exposure to the transition.”