BlackRock sees growing demand for thematic ETFs as an inflation hedge

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(Bloomberg) — Investors are turning to certain thematic exchange-traded funds to hedge against inflation and take advantage of renewed performance in value stocks this year, according to Jay Jacobs, U.S. head of thematic and active-equity ETFs at BlackRock Inc. .

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Jacobs joined the “What Goes Up” podcast to discuss how the firm is evaluating investment opportunities in an uncertain economy. Below are the condensed and slightly edited highlights of the conversation. Click here to listen to the full podcast, or subscribe on Apple Podcasts or wherever you listen.

Q: What are the hottest thematic ETFs of the year?

A: In the theme space, it’s been really interesting. Much of the leadership in the topic space over the past three or four years has been in disruptive technology. He looked at things like cloud computing during the pandemic when we were all working from home, it was around genomics and biomedicine when we were trying to figure out the vaccine situation and testing. But now it’s really pivoted, especially as we’ve seen broader shifts within the value growth market. People are looking for more themes that sit in the value space, especially themes that we believe will be more resilient in this high inflation environment.

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So we’ve seen a lot of interest in infrastructure as a theme. We’ve seen incredible interest in food-related themes, especially as we’ve seen inflation in the supermarket. And then we also saw the interest in clean energy as an inflation game, as well as some of the more recent news coming out of Washington. So we are, once again, seeing this change – it is no longer just about disruptive technologies. We see themes that play a little more into this value end of the spectrum as investors look for long-term structural trends, but ones that can still do well in this different environment than the one we found ourselves in.

Q: And these different themes are for this inflationary environment, right? Could you perhaps explain to us these key themes and why they work in today’s world?

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A: It has a lot to do with the companies underlying this theme and why do we think it will benefit from an inflationary environment. So starting with infrastructure, many infrastructure asset owners – companies that run airports, toll roads, seaports, or utility companies – can literally change their tolls based on the CPI. It is therefore a natural built-in trade hedge against inflation. When inflation is higher, they can raise their prices, especially if their regulated prices are linked to the CPI. And that just neutralizes those companies from an inflation perspective.

What is also happening in this space is that a lot of money is being pumped into infrastructure under the Infrastructure Investment and Jobs Act. So there’s a lot of infrastructure building that, frankly, these companies don’t have to pay for, or they get tax credits or other benefits to build that infrastructure, which helps. And finally, when you think about the economic environment we find ourselves in, infrastructure tends to be very non-cyclical. So if we start to see a recession, or if the economy slows down, people are still turning on the lights, they’re still using their ovens, they’re still paying their water bills. And so not only does it have this inflation component, but there’s also a defensive component to this chart that gives people this sweet spot of, we don’t know if there’s a recession, we don’t know how many time inflation will last around, and we also want to participate in long-term structural growth. Inflation really hits all three points.

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The second theme that really excites us from an inflation perspective is agri-tech and food innovation. And I’ll be honest, it’s a theme that we thought would really play out over the next 20 years. We took a step back and said, the arable land in the world is quite limited, there is a finite amount of land in the world. On the contrary, it has decreased due to climate change and the increase in floods and forest fires, which reduces the arable land somewhat. But on the demand side of the equation, we’ve seen growing consumption from emerging markets, which are spending more money on food and more complex foods like protein and dairy. We have seen a growing world population, which will reach 10 billion people by 2050. And we are seeing a shift in food preferences where people increasingly demand sustainable food.

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So just looking at that, we thought that over the next few decades we were going to have this imbalance of supply and demand around food that would create food inflation. Of course, this was brought forward 20 years ahead of schedule due to the conflict in Eastern Europe, which took a lot of wheat offline, due to general global supply chain disruptions, which made harder to ship food around the world. . So we’re seeing food inflation, we see it in a very powerful way, but we also have these solutions that already exist with agricultural technology, like precision farming, precision watering, reduced use of chemicals , more resistant crops, and this is accelerated by this environment.

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And then the third theme is clean energy where we saw that a lot of the cost of clean energy is really in the initial construction. You build a solar farm, you build a wind turbine. This cost is mainly up front. Yes, there are services going on, but a lot of those costs are essentially fixed compared to more traditional forms of power generation, where you constantly pay for fuels. Thus, in an inflationary environment where commodity prices are rising, the upfront payment of a large portion of these costs tends to be profitable. So those are the three segments that we think are really in the inflation sweet spot, but also how those long-term tailwinds.