With consumer prices spiking and eroding the worth of the dollar, investors are turning to inflation-linked exchange traded funds strategies that help preserve their purchasing power.
Treasury Inflation-Protected Securities, commodities, and real estate investment trusts are among the most popular inflation hedging ETF categories, the Financial Times reports.
“We expect inflation to remain elevated in the next year, well above the Fed target, particularly as the supply-demand imbalance takes time to sort itself out,” Roger Aliaga-Diaz, senior economist at Vanguard, told the Financial Times.
Consequently, investors are prepping their portfolios for the harder times ahead. For example, investors have funneled a record $66.8 billion into ETFs tracking TIPS, or U.S. government bonds that are indexed to inflation, according to EPFR data.
For instance, the iShares TIPS Bond ETF (NYSEArca: TIP) brought in $11.4 billion, the Vanguard Short-Term Inflation-Protected Securities ETF (NYSEArca: VTIP) saw $9.0 billion in inflows, and the Schwab U.S. TIPS (NYSEArca: SCHP) has attracted $7.3 billion so far in 2021.
BlackRock, the world’s largest asset manager, even projected that inflation will persist at higher levels than those before the coronavirus pandemic, and the asset manager has an overweight position in TIPS as a result.
Additionally, Sonal Desai, chief investment officer at Franklin Templeton, preferred certain energy-based commodities or currencies as indirect hedges to inflation, since Federal Reserve actions could negatively affect the fixed income and TIPS market.
Commodities or real assets have also been a big hit among investors. For instance, the Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC) has been a popular broad commodities play that provides exposure across a range of real assets, including crude oil, base metals, and gold, among others.
“Commodities like oil tend to be pretty good hedges, if longer-term inflation is expected,” Mike Sewell, fixed income portfolio manager at T. Rowe Price, told the Financial Times.
While gold has traditionally acted as an inflation hedge, the SPDR Gold Shares (NYSEArca: GLD) seemed rather lackluster this year, suffering $10 billion in outflows.
Lastly, REITs have been a popular bet, since they generate income through rents, which can rise alongside inflation, and the property values have been appreciating with higher demand.
ETF investors can access the REITs space through a number of ETF strategies, such as the Vanguard Real Estate ETF (NYSEArca: VNQ) and the Schwab US REIT ETF (NYSEArca: SCHH), among others.
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