ETF Options to Hedge Against Falling Prices, Low Inflation

For instance, long-term bond ETFs will benefit. As prices decline, the real value of fixed-coupon payments look more attractive, and longer duration securities will typically outperform other bonds since their coupon payments are set for an extended period. The iShares 20+ Year Treasury Bond ETF (NYSEArca: TLT) tracks long-term U.S. Treasuries with a 17.19 year effective duration and a 3.09% 30-day SEC yield. The Vanguard Long-Term Corporate Bond ETF (NYSEArca: VCLT) follows investment-grade, long-term corporate debt with an average duration of 13.9 years and a 4.49% 30-day SEC yield.

While deflation is usually bad for stocks – profits will fall on lower prices, dividend-paying stocks and related ETFs may also be used as a way to hedge deflationary risks. The dividend yields act like coupon payments for bonds, and most companies are not in a habit of cutting dividends. For example, the PowerShares High Yield Equity Dividend Achievers Portfolio (NYSEArca: PEY), which track a group of stocks with consistent growth in dividend, has a 3.4% 12-month yield and the iShares Core High Dividend ETF (NYSEArca: HDV), which includes high quality U.S. stocks with attractive yields, comes with a 3.15% 12-month yield. [A Dividend ETF with Consistently Sturdy Yields]

As prices dip, the purchasing power of the dollar improves. Consequently, investors can also look at ETFs that act as cash alternatives, such as short-term bond ETFs. The actively managed PIMCO Enhanced Short Maturity ETF (NYSEArca: MINT) has a 0.46% effective duration and a 0.47% 30-day SEC yield, and the Guggenheim Enhanced Short Duration Bond (NYSEArca: GSY) has a 0.47% effective duration and a 1.03% 30-day SEC yield. [No Free Lunch with Ultra-Short-Term Bond ETFs]

For more information on the changing consumer prices, visit our inflation category.

Tom Lydon’s clients own shares of TLT.