Institutions have been slowly building up their inflation hedges and the average investor can also shield themselves against the negative effects of inflation through exchange traded funds that track real assets.
Institutional-class investors, including multibillion-dollar pensions, endowments and foundaments, have been slowly and quietly hoarding real assets as an inflation hedge in response to the Federal Reserve’s tightening monetary stance, reports Jeff Benjamin for InvestmentNews.
According to Greewich Associates, 80% of institutional investment consultants pointed to inflation protection as a primary reason for holding real assets, along with 65% of instittuions that alraedy invest in the asset class. Institutional investors’ inflation bucket now represents about 10% of their overall investment portfolios.
“The longer-term attraction of real assets is definitely the inflation sensitivity,” Keith Black, managing director of curriculum and exams at the Chartered Alternative Investment Analyst Association, said in the article. “Another part of the attraction is that we’re talking about something that is real and that people can actually touch. After the financial crisis, people realized that the stocks and bonds they owned were just paper assets.”
Specifically, real assets include investments like real estate, timber, physical commodities, precious metals and master limited partnerships.
The average retail investor can diversify their portfolios with these assets through targeted exchange traded funds. For instance, the Vanguard REIT ETF (NYSEArca: VNQ) and iShares Dow Jones US Real Estate Index Fund (NYSEArca: IYR) track a broad range of real estate investment trusts. VNQ excludes mortgage REITs and non-real-estate specialty REITs while IYR covers all domestic REITs. [Sector Classification Change Could Boost REITs ETFs]
While there are no timber commodity ETFs available, investors interested in the wood market can gain exposure through ETFs that track global timber-related companies, such as the Guggenheim Timber ETF (NYSEArca: CUT) and iShares Global Timber & Forestry ETF (NYSEArca: WOOD).
For broad commodities exposure, the GreenHaven Continuous Commodity Index Fund (NYSEArca: GCC) follows an equal-weight methodology that covers 17 commodity positions. In addition, the PowerShares DB Commodity Index Tracking Fund (NYSEArca: DBC), the largest commodity-related ETF, tracks a broad basket of the 14 most heavily traded commodities and uses an optimum yield methodology that tries to limit the negative effects of contango.
The ETFS Physical Precious Metals Basket Shares (NYSEArca: GLTR) provides broad exposure to precious metals, including gold, silver, platinum and palladium bullion. The SPDR Gold Shares (NYSEArca: GLD) and iShares Silver Trust (NYSEArca: SLV) are the two largest U.S.-listed gold and silver ETFs. [Asian Demand to Buff Tarnished Gold ETFs]
Lastly, the ALPS Alerian MLP ETF (NYSEArca: AMLP) and JPMorgan Alerian MLP Index ETN (NYSEArca: AMJ) are the two largest MLP-related exchange traded products on the market, and both track the Alerian MLP Index. Unlike other energy sector stocks, MLPs primarily deal with distribution and storage of energy products, so their business model is less reliant on the commodities market since MLPs profit off the quantity of oil and natural gas they are able to move around. [Another Big Year of MLP ETF Inflows]
“From a diversification standpoint, real asset investments are quite different than what you’re going to get in a traditional long-only stock or bond fund,” Todd Rosenbluth, director of mutual fund research at S&P Capital IQ, said in the article. “The beauty of these is that they are not related, and you want to consider some places that haven’t done as well to make sure you’re properly diversified.”
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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. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. 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.