How to Protect Yourself from the Big Deficit With ETFs | ETF Trends

The U.S. government is incurring an ever higher budget deficit and it will be up to American citizens to carry the burden. With taxes increasing, inflation rising and the dollar falling, investors may want to change their exchange traded fund (ETF) portfolio strategies in order to protect themselves.

The Obama administration is estimating that the federal budget could double over the next decade and Moody’s Investor Service is warning that the U.S.’s AAA credit rating “could come under downward pressure” as a result, according to The Wall Street Journal. The increasing amount of government debt could set off a “triple whammy” of weak economic growth, higher inflation and higher tax bills, says Laurence Siegel, director of Research Foundation of the CFA Institute

President Barack Obama is considering raising taxes on the wealthy, increasing top rates to 39.6% from 35%, and pushing capital gains and dividends top rates to 20% from 15%. There are main strategies to help lower one’s tax burdens: First, start a Roth IRA or convert a traditional IRA into a Roth. Second, take advantage of low capital-gains rates and sell highly appreciated assets. Lastly, the tax-free income of municipal bonds become more attractive as taxes increase.

  • PIMCO Intermediate Municipal Bond Strategy Fund (NYSEArca: MUNI)
  • PowerShares Insured National Muni Bond (NYSEArca: PZA)
  • iShares S&P National Municipal Bond Fund (NYSEArca: MUB)
  • SPDR Lehman Municipal Bond ETF (NYSEArca: TFI)

When the U.S. dollar depreciates, the value of assets priced in foreign currencies tend to rise. Charlie Gushee, head of Western European sales at Auerbach Grayson & Co., suggests putting money into stable, dividend-paying foreign firms “that have zero or next to no dollar revenues.” Investing in emerging markets is also prudent since companies in these markets have dollar-denominated debt, which would be easier to pay if their local currency appreciated.

  • WisdomTree International Large Cap Dividend (NYSEArca: DOL)
  • WisdomTree International Utilities (NYSEArca: DBU)
  • Vanguard Emerging Markets (NYSEArca: VWO)
  • Emerging Global Shares Dow Jones Emerging Markets Energy Titans (NYSEArca: EEO)

If inflation rises, investors should consider switching regular bonds like Treasuries to Treasury Inflation-Protected Securities (TIPS). TIPS bond’s principal and interest payments grow with inflation. However, worried investors have been bidding up prices of TIPS, which is dampening yields. You may also think about corporate bonds, municipals and savings bonds, but the investments may have higher fees and difficult to sell if inflation abates.

  • PIMCO Broad U.S. TIPS (NYSEArca: TIPZ)
  • PIMCO 15+ Year U.S. TIPS (NYSEArca: LTPZ)
  • PIMCO 1-5 Year U.S. TIPS (NYSEArca: STPZ)
  • iShares Barclays TIPS Bond (NYSEArca: TIP)
  • SPDR Barclays Capital TIPS (NYSEArca: IPE)

Commodities usually go up when basic materials become pricier during inflationary times. Commodity ETFs would give investors an opportunity to invest in the basic building blocks of everyday life. Still, it should be noted that a stagnant economy could weigh down commodity prices.

  • iShares S&P GSCI Commodity-Indexed Trust (NYSEArca: GSG)
  • PowerShares DB Agricultural Fund (NYSEArca: DBA)
  • Market Vectors RVE Hard Assets Producers (NYSEArca: HAP)

For more information on investing in ETFs, visit our ETF 101 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.