ETFs for a Deflationary Period | ETF Trends

As a closely watched gauge for inflation declined to a 14-year low, investors can adjust for a deflationary environment with certain assets and exchange traded funds.

During deflationary periods, cash is king. If the U.S. dollar continues to strengthen against foreign currencies, ETF investors can capture the movement through the PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP) and the actively managed WisdomTree Bloomberg U.S. Dollar Bullish Fund (NYSEArca: USDU). [King Dollar ETFs are Quite Royal in January]

Low inflation also preserves the value of fixed-income assets and lift real yields. Consequently, investors can stick with high-quality fixed income assets, such as government bonds. For instance, the iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF) has a 7.73 year duration and a 1.9% 30-day SEC yield, Schwab Intermediate-Term U.S. Treasury ETF (NYSEArca: SCHR) has a 5.2 year duration and a 1.58% 30-day SEC yield and Vanguard Intermediate-Term Government Bond ETF (NYSEArca: VGIT) has a 5.3 year duration and a 1.55% 30-day SEC yield. [Short-Duration Bond ETFs to Mitigate Potential Volatility]

Fixed-income investors can also track municipal debt through the iShares National AMT-Free Muni Bond ETF (NYSEArca: MUB), which has a 6.32 year duration and a 1.58% 30-day SEC yield. The SPDR Nuveen Barclays Municipal Bond ETF (NYSEArca: TFI), which has a 7.18 year duration and a 1.88% 30-day SEC yield.

Additionally, for investment-grade corporate bond exposure, the iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEArca: LQD) has a 8.08 year duration, 3.11% 30-day SEC yield, Vanguard Intermediate-Term Corporate Bond ETF (NYSEArca: VCIT) has a 6.4 year duration and a 3.10% 30-day SEC yield, and SPDR Barclays Intermediate Term Corporate Bond ETF (NYSEArca: ITR) has a 7.18 year duration and a 1.88% 30-day SEC yield.

Along with the fixed-income and U.S. dollar plays, investors can also take a look at the PowerShares DB US Deflation ETN (NYSEArca: DEFL), which specifically targets falling prices. The exchange traded note is based on the DBIQ Duration-Adjusted Deflation Index, which tracks the movement of U.S. deflation expectations. Over the past three months, DEFL has increased 11.9%. However, the ETN is small, so investors who are interested should use limit orders to better execute trades.

The five-year forward five-year break-even rate, a measure of annual inflation expected by investors between 2020 and 2025, dropped to 1.8648% Tuesday, the lowest level since December 22 2000, reports Min Zeng for the Wall Street Journal. The Federal Reserve is targeting a inflation rate of just below 2% as ideal for annual price gains.