These 3 ETFs Could Benefit From the Parts of Inflation That Won’t Go Away

Key Points

• Rising prices in real estate, utilities, and environmental services give companies in those industries pricing power that can benefit shareholders.
• Three sector ETFs—EVX, IYR, and VPU—offer diversified exposure to companies positioned to pass along higher costs to consumers.
• Despite recent share price declines in IYR and VPU, their dividend yields and sector characteristics may appeal to income-focused investors.

It's not just the cost of goods that is rising, although inflation remains a persistent source of consumer frustration. The U.S. services sector saw growth cool in September, even as domestic demand remains robust, while supply chains have become stretched, and prices continued to be elevated. Customers of all kinds are having to spend more for real estate, utilities, and environmental services as companies in those industries maintain pricing power.

For investors, there is an opportunity among companies that can pass some of those increased prices along to shareholders as a benefit. An industry-wide approach may provide the broadest access to firms in this category. Each of the exchange-traded funds (ETFs) below includes firms that help investors capture as much of the services sector's pricing power as possible.

Vital Environmental Services Companies Benefit From Price Increases

The VanEck Environmental Services ETF NYSEARCA: EVX holds shares of a group of companies involved in waste management, water treatment, and related industries. In addition to being one of the most vital services for residential and commercial customers, waste disposal is among the group of services seeing prices rise.

Many companies in this industry can expand their geographic reach and raise prices with only incremental increases in costs. The result is an industry that may be better prepared to improve both revenue and profitability. Because many firms in this space already pay dividends, investors might look for growing distributions. EVX's dividend yield of 0.18% is modest for now, but it is worth watching going forward.

A potential tradeoff for investors considering EVX is its relatively concentrated portfolio, which includes just over two dozen global environmental services stocks. Each of the largest positions in its portfolio is around 8% or more, which may make the fund too narrow for some investors. Still, the broad geographic diversification of the portfolio may help to mitigate risk.

For its specialized approach, EVX carries a fairly high expense ratio of 0.55%.

A Highly Diversified Real Estate Play to Capture Manufacturing Gains

With the housing market facing compounding pressures due to inflation, soaring mortgage rates, and consumer hesitation—and as manufacturing mounts a comeback—there is an opportunity for real estate companies to benefit. The iShares U.S. Real Estate ETF NYSEARCA: IYR may be able to capture some of those potential gains.

As real estate and services sector assets have maintained their pricing power, IYR's diversified exposure to real estate investment trusts (REITs) targeting a variety of retail, health care, industrial, and residential properties is an asset. Investors may be inclined to overlook the real estate sector due to the housing market, but IYR's broad portfolio is more focused on medical facilities, data centers, telecom properties, and the like.

The 62 holdings in IYR's basket represent REITs with a wide range of real estate investments, adding another layer of diversification to help moderate risk in any one corner of the real estate market. The ETF also offers the benefit of REITs' built-in dividend mechanism and currently provides a dividend yield of 2.52%. While recent performance has been lacking—shares of IYR are down almost 8% in the last month and are trading essentially flat year to date (YTD)—this distribution may appeal even if there is broader uncertainty in the sector.

Utilities Stocks Benefit From Inflation Provisions

The Vanguard Utilities ETF NYSEARCA: VPU offers access to a group of utilities stocks that enjoy regulated rate bases that can lead to predictable earnings. The contracts for utilities companies include inflation pass-through provisions, which allow those companies to pass higher costs on to consumers and, in turn, for VPU to directly capture gains whenever possible.

Like REITs, utilities stocks are typically very attractive to dividend investors due to their defensive nature. VPU's dividend yield sits at 2.90%, a reflection of the distributions of the 70 companies in its portfolio.

Across the utilities sector, valuations have been compressed as a result of higher interest rates and related borrowing costs. This may make VPU appeal to investors looking for a time to access the sector before a potential turnaround down the line. Indeed, shares of this fund are down almost 5% in the last month.

As one of the most popular funds focused on utilities, VPU has a solid asset base of close to $8 billion. However, its status as a defensive play means that its trading volume remains relatively low. Investors may be willing to buy and hold this fund anyway, though, because its expense ratio is fairly modest at 0.09%.