Consequently, investors should be prepared for a higher inflationary environment and can utilize targeted ETF strategies to hedge against the negative effects of inflation on a portfolios purchasing power.
For example, the IQ Real Return ETF (NYSEArca: CPI) invests in a number of various ETFs with the objective of providing a hedge against inflation or provides a multi-asset inflation hedging approach. Specifically, the ETF includes exposure to short-term Treasuries, short contracts on Treasury bonds, the S&P 500 and Russell 2000.
The iShares Floating Rate Bond ETF (NYSEArca: FLOT) is one of the largest ETFs dedicated to floating rate notes. Floating rate notes, like the name suggests, have a floating interest rate and may limit the negative effects of rate risk, especially as the Fed considers raising interest rates to fight off an overheating economy with rising inflationary pressures.
ETFs that track Treasury inflation protected securities such as the iShares TIPS Bond ETF (NYSEArca: TIP) track a type of Treasury security that is indexed to inflation as a way to shield investors from the negative effects of inflation. The securities’ par value rises with inflation as measured by the Consumer Price Index while interest rate remains fixed. TIPS also offer investors another layer of diversification as many aggregate bond funds exclude TIPS from their holdings.
Precious metals and gold ETFs, such as the SPDR Gold Shares (NYSEArca: GLD), are a great way to fight inflation. Inflationary pressures could serve as a catalyst for the yellow metal and for gold-related ETFs. By some metrics, the Fed has under-estimated U.S. inflation, which could prove beneficial to gold because the yellow metal is historically a popular inflation fighter or act as a physical store of wealth.
Additionally, investors can also gain broad commodities market exposure through something like the United States Commodity Index Fund (NYSEArca: USCI). Academic studies have found that commodities protected against inflation better than stocks and bonds and consistently outperformed traditional assets during periods of rising inflation.