Inflation is one of those financial buzzwords that investors may once again be keen to factor into their decision process. The last half decade has been tepid by most traditional inflationary metrics. Commodity prices historically low, wage growth was benign, and the offset of technological deflation helped mask outsized gains in other areas.
As we enter a more mature phase of the current economic growth cycle, it’s worthwhile to consider the net effects that rising prices for goods and services will have on your purchasing power. The combination of healthy real estate prices, surging labor costs, and raw material strength may once again become a prominent risk to many consumers.
For some investors, addressing this risk becomes as simple as turning to exchange-traded funds that benefit from inflationary pressures. Those that track companies engaged in natural resource production or that are directly tied to commodities themselves are an obvious example.
Inflation Fighting ETFs
The PowerShares DB Commodity Index Tracking Fund (DBC) is a diversified index of commodities futures contracts tied to the most liquid and heavily traded sectors. Think crude oil, precious metals, heating oil, agricultural products, and industrial supplies. The aggregate price of these materials has been steadily climbing since mid-2017 and continue to demonstrate formidable strength.
Commodities have benefited from a downtrend in the U.S. dollar versus rival foreign currencies alongside a pickup in global demand over the last year.
Another sector exchange-traded fund that many investors turn to in the inflation-fighting realm are TIPS, or Treasury Inflation Protected Securities. These specialty Treasury bonds function by carrying an embedded link to the consumer price index published by the Bureau of Labor Statistics. TIPS can see their face value dynamically adjust higher during periods of inflationary headwinds, creating a more attractive rate of return for investors in these debt securities.