Inflation May Be on Right Track, but VGISX Protection Still Warranted

The October reading of the Consumer Price Index (CPI) showed encouraging signs that inflation may finally be easing, but some market observers believe it’s still appropriate for investors to consider asset classes with inflation-fighting reputations. That’s a practical sentiment because inflation remains at multi-decade highs and because some inflation-fighting segments let investors down this year, indicating that some of those assets may be offering value today. Real estate investment trusts (REITs), accessible via the Virtus Duff & Phelps Global Real Estate Securities (VGISX), are part of the conversation.

One of the biggest stumbling blocks encountered by REITs this year — one that’s likely leading to disappointing performance — is the Federal Reserve boosting interest rates to temper inflation. REITs are rate-sensitive, but in what could amount to good news for VGISX heading into 2023, it appears that the Fed will dial back the intensity of rate hikes.

“While inflation looks to be trending down, investors may still want to add inflation protection to their portfolios. After all, inflation doesn’t just affect current consumption—it also eats into investment returns and erodes wealth,” noted Morningstar analyst Margaret Giles.

Even if inflation consistently trends lower from here, it remains high by historical standards, indicating that there’s still ample runway for inflation-protecting assets such as VGISX to benefit investors. In the case of the Virtus fund, that scenario could be amplified for the better if the Fed holds off on sizable rate hikes or pauses altogether.

Additionally, VGISX could be an ideal fund for investors to consider because it levers them to a possible rebound in equities while keeping them somewhat clear of potential issues with inflation-linked fixed income assets.

“While I Bonds are a safe hedge against inflation, they aren’t a panacea. One major drawback is the purchase limit of $10,000 per year,” added Giles. “This purchase constraint is particularly restricting for larger investors. Some investors may also have issues with I Bonds’ lack of liquidity. Rather than making regular interest payments, I Bonds only pay out when they are sold—and that’s only possible at least 12 months after purchase.”

VGISX could be a relevant inflation consideration for younger investors because while the fund could be riskier than a bond fund, it also offers more upside potential — something for investors with the luxury of time to consider. On a related note, equities usually aren’t great short-term inflation hedges, but the opposite is true over longer holding periods.

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. 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.