1 of the Best ETFs to Win the Fight Against Inflation in 2022

The iShares S&P/TSX Capped Energy Index ETF (TSX:XEG) is an intriguing way to fight off inflation in yet another year of economic recovery.

| More on:
exchange traded funds

Image source: Getty Images

The Bank of Canada (BoC) shocked, awed, and disappointed many last month when it didn’t raise interest rates, instead opting to do nothing. Indeed, the BoC now runs a greater risk of falling behind the curve, just like the U.S. Federal Reserve, by standing pat with inflation where it is today. Inflation is running hot, and interest rates could help put that inflation genie back in the bottle after it was brought out in 2020. Will the BoC raise in its next meeting? Arguably, it will have to, given how quickly prices are rising across the nation. With the loonie sliding on the inaction, I think investors should take a second look at some securities to help combat what could be another year of persistent inflation.

While markets are currently pricing in a handful of rate hikes (perhaps four or so), I think there’s a chance that three or fewer rate hikes may actually be dealt out. The BoC already shocked us to the dovish side this year. Can it do it again? Possibly. The Fed may even be more hawkish than the BoC. And if that’s the case, the loonie could have more room to the downside, all while inflation sticks around.

Fighting inflation with commodities?

For investors, don’t expect inflation will just magically go away, especially without faster and more furious interest rate hikes. Nobody knows if we’ll have a dovish surprise this year. Still, with nothing but hawkishness baked into the markets after a January correction to the S&P 500, I’d argue that equities and inflation hedges are the places to be, not cash, bonds, and cash equivalents that remain incredibly unrewarding. Of course, cash should be saved to buy dips like the one experienced just a few weeks ago. In any case, many conservative investors likely have too much cash and less skin in the game, leaving them vulnerable to continued inflation.

Without further ado, consider the iShares S&P/TSX Capped Energy Index ETF (TSX:XEG).

iShares S&P/TSX Capped Energy Index ETF

Energy has been on an incredible run this year, and I don’t think that’s about to end anytime soon! Higher oil prices are lifting all boats across Canada’s hard-hit energy patch. With the tables now turned in their favour, I think there’s no telling how much higher they’ll stand to fly in the face of more inflation. Indeed, US$100 WTI is a possibility, even though it was viewed as an absurdity just over a year ago!

The XEG has a good number of Canadian energy producers, many of which are still dirt-cheap, alongside a modest MER. While nobody knows if the momentum will carry into year-end, I am a fan of the risk/reward despite the remarkable performance in the rear-view mirror.

If you’re energy-light, the XEG is a great way to go. The ETF is already up 18% year to date, so a pullback may be the most opportune time to give it a second look! Though, I’m not against buying here if you’re looking to outpace inflation.

Bottom line

The XEG isn’t necessarily an inflation hedge, but it is a great low-beta way to put your money to work if you’re already overexposed to the broader equity markets. Energy is making a comeback, and I wouldn’t be surprised if it’s sustained into year-end.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joey Frenette has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

More on Energy Stocks

oil and natural gas
Energy Stocks

Oil Stocks: The Next 3 Months Are Key

Oil stocks like Suncor Energy Inc (TSX:SU)(NYSE:SU) are reporting earnings soon. There are two other big events happening, too.

Read more »

Oil pumps against sunset
Energy Stocks

Want Monthly Passive Income? These TSX Dividend Stocks Are for You

Create a passive income stream with monthly paying dividend stocks on the TSX such as Pembina Pipeline and Freehold Royalties.

Read more »

Group of industrial workers in a refinery - oil processing equipment and machinery
Energy Stocks

Why Suncor Energy Stock Could Lose its Underperformer Tag Soon

So far this year, SU stock has gained 21%, while TSX energy stocks at large have gained 38%.

Read more »

money cash dividends
Dividend Stocks

Canadian Investors: Where to Put $100 Right Now

Canadians with $100 to invest can put their money to work in three low-priced, dividend-paying TSX stocks.

Read more »

Dice engraved with the words buy and sell
Dividend Stocks

Not Every Cheap Stock has Value: 1 Stock to Buy, 1 to Sell, and 1 to Hold

The market downturn has created an opportunity to buy value stocks at a bargain. Here’s a guide to optimizing your…

Read more »

Upwards momentum
Energy Stocks

Gold and Energy: Here Are Two of the Best Stocks to Buy Now

Gold and energy stocks are some of the best to buy now for very different reasons.

Read more »

A worker overlooks an oil refinery plant.
Energy Stocks

Here’s Why I’m Buying the Dip in Suncor (TSX:SU) Today

Suncor Energy Inc. (TSX:SU)(NYSE:SU) stock is worth buying, even as oil and gas prices have softened in the second half…

Read more »

Senior couple at the lake having a picnic
Energy Stocks

TFSA: How to Maximize Your Contributions to Retire Rich

The RRSP isn’t the only account that can be used for retirement savings. Here’s how you can use a TFSA…

Read more »