With inflation on the rise, investors may consider ETF themes that may help diminish the negative effects and diversify an investment portfolio.
U.S. inflation accelerated in May to the fastest pace in over six year, reports Katia Dmitrieva for Bloomberg. The consumer price index was up 0.2% from the previous month and 2.8% year-over-year, its biggest annual gain since February 2012.
Excluding food and energy, core prices were 0.2% higher month over month and 2.2% from May 2017.
The data “provide further evidence that inflation is moving towards the Fed’s objective,” and the central bank will continue on its gradual rate-hike path, Kevin Cummins, an economist at NatWest Markets, told Bloomberg. The pay figures are “a reminder that you don’t need to necessarily get more aggressive in your approach because wages haven’t accelerated as much as they have in the past.”
The Fed’s preferred gauge of inflation met the central bank’s 2% goal during March and April – the gauge typically runs slightly below the Labor Department’s CPI.
As inflation begin to pick up on a growing economy with an 18-year low in unemployment and steadily rising wages, investors may want to think about ways to protect their investments against lower real returns. Consequently, one should consider allocations to assets expected to perform well when inflationary pressures rise.
For starters, 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.
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.
Related: ETF Trends Fixed Income Channel
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.
Some traders can also take advantage of higher gold prices with gold miners ETFs, including the VanEck Vectors Gold Miners ETF (NYSEArca: GDX), the largest exchange traded fund dedicated to gold mining stocks. Gold producing companies see profitability rise along with the price of gold, making this sector another good option for combating inflation and assuming gold performs well when inflation accelerates.
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.
For more information on ETFs, visit our ETF Performance Reports category.