While the U.S. is stuck with an anemic inflation rate, investors can ride out a deflationary environment through certain assets and exchange traded funds.
According to the Bureau of Labor Statistics, the total national rate of inflation was 0.2% in August, reports Jeff Cox for CNBC.
Only the West had a positive Consumer Price Index for August, so excluding the West, the national rate of inflation would have been -0.19% in August.
The deflationary pressure was mostly a result of lower energy prices, which have declined 9.5% annualized in the West, 14.5% in the Midwest, 18.3% in the East and 17.1% in the South.
Additionally, while the economy has expanded and employment rates have risen, wage growth remains stagnant.
“Our economy has made good progress toward full employment, but sluggish wage growth suggests there is some room to go, and inflation has remained persistently below our target,” Cleveland Fed Gov. Lael Brainard said in a speech. “With equilibrium real interest rates likely to remain low for some time and policy options that are more limited if conditions deteriorate than if they accelerate, risk management considerations counsel a stance of waiting to see if the risks to the outlook diminish.”
Meanwhile, ETF investors have a number of options to play during a deflationary environment. For starters, 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).
Low inflation also preserves the value of fixed-income assets and lift real yields, or nominal yield minus rate of inflation. 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 7.63 year duration and a 1.85% 30-day SEC yield, Schwab Intermediate-Term U.S. Treasury ETF (NYSEArca: SCHR) has a 5.2 year duration and a 1.44% 30-day SEC yield and Vanguard Intermediate-Term Government Bond ETF (NYSEArca: VGIT) has a 5.6 year duration and a 1.45% 30-day SEC yield.
Fixed-income investors can also track municipal debt through the iShares National AMT-Free Muni Bond ETF (NYSEArca: MUB), which has a 4.72 year duration and a 1.70% 30-day SEC yield. The SPDR Nuveen Barclays Municipal Bond ETF (NYSEArca: TFI), which has a 7.95 year duration and a 2.01% 30-day SEC yield.
For investment-grade corporate bond exposure, the iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEArca: LQD) has a 8.01 year duration, 3.53% 30-day SEC yield, Vanguard Intermediate-Term Corporate Bond ETF (NYSEArca: VCIT) has a 6.4 year duration and a 3.47% 30-day SEC yield, and SPDR Barclays Intermediate Term Corporate Bond ETF (NYSEArca: ITR) has a 4.37 year duration and a 2.66% 30-day SEC yield.
Additionally, investors can also look for dividend stocks because they would still be worth more in purchasing power through their yield generation even if the price levels decline. Iinvestors may turn to stocks that have consistently raised dividends as a way to generate more attractive returns. For instance, the Vanguard Dividend Appreciation ETF (NYSEArca: VIG) tracks U.S. stocks that have increased dividends on a regular basis for at least 10 consecutive years and has a 2.44% 12-month yield. The Schwab US Dividend Equity ETF (NYSEArca: SCHD) includes 100 stocks based on strong fundamentals, dividend yields and consistent dividend payouts for at least 10 consecutive years, and it has a 3.2% 12-month yield. The SPDR S&P Dividend ETF (NYSEArca: SDY) holds firms that have a minimum dividend increase streak of 20 years for inclusion and shows a 2.56% 12-month yield. The ProShares S&P 500 Aristocrats ETF (NYSEArca: NOBL) only includes companies that have increased their dividends for at least 25 consecutive years and offers a 2.03% 12-month yield.
For more information on ETFs, visit our ETF 101 category.
Max Chen contributed to this article.