6 Ways to Fight Inflation with ETFs

December 16th at 4:24pm by Tom Lydon

While not as big a problem right now, inflation will eventually begin to rise as years of loose monetary policies and stimulus measures put pressure on prices. Meanwhile, exchange traded fund investors have a number of options to hedge against a rise in consumer prices.

In a white paper, GMO’s James Montier points out several inflation hedging tools:

  • Treasury Inflation Protected Securities (TIPS). “This is, I believe, the one true inflation hedge,” Montier said. However, Montier cautions that these assets are better suited as long-term inflation hedges for those who intend to buy-and-hold since short-term returns can shift according to changes in real rates. The iShares TIPS Bond ETF (NYSEArca: TIP) has a 7.55 real yield duration and a 0.06% 30-day SEC yield.
  • Cash. Cash is considered less effective than TIPS since a central bank can lower rates below the inflation level, in which case cash will yield a negative return. On the other hand, cash tends to return more than inflation, which makes it a good long-term hedge. ETF investors can take a look at the PowerShares DB US Dollar Index Bullish (NYSEArca: UUP) to gain access to the U.S. dollar price movement against a basket of developed foreign currencies.
  • Real Estate. “In general it looks as if property does indeed act as a very long-term inflation hedge,” Montier said. However, he warns that it isn’t a good short- to medium-term inflation hedge. A real estate ETF, like the iShares U.S. Real Estate ETF (NYSEArca: IYR), provides exposure to the U.S. real estate market through related stocks and real estate investment trusts, or REITs.
  • Infrastructure. “Infrastructure is similar in fashion to real estate, often with a direct tie to inflation plus pricing,” Montier said. The iShares S&P Global Infrastructure Index Fund (NYSEArca: IGF) provides a global perspective to the infrastructure sector.
  • Stocks. Historically, stocks across many countries have exhibited a resilience against inflation as companies are able to pass along their higher costs by raising prices. However, companies may suffer from short-term inflationary pressures. “Equities are generally an underappreciated inflation hedge,” Montier added.
  • Commodities. Commodities and other hard assets are considered an inflation hedge, but there are many different types of commodities available and investors are left deciding which will act as the best choice. Investors can look at a diversified option, like the PowerShares DB Commodity Index Tracking Fund (NYSEArca: DBC), or consider picking out individual commodity-backed ETFs. However, you will have to be comfortable with short-term risks associated with any particular market.

For more information on inflation, visit our inflation category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.