Inflation has been a particularly frustrating topic in recent months. Despite widespread predictions for a surge in CPI in the wake of unprecedented injections of liquidity into global financial markets, upward pressure on prices has not yet materialized -- at least not in many developed markets. The prospect of what seems to be an inevitable outcome has prompted many to take measures to protect their portfolios, increasing allocations to asset classes expected to generally perform well when inflationary pressures spike. Countless investors have been wrong in their calls on inflation, ranging from Wall Street titans such as Morgan Stanley to smaller money managers and individuals.
Another frustrating aspect of inflation is the difficulty many investors face in protecting their portfolios from the phenomenon. Debates over the relative merits of various securities as safeguards against inflation have raged for decades, with different investors pursuing different strategies. Each inflationary environment is unique, and inflation of course does not exist in a vacuum. There's no silver bullet that is guaranteed to offset inflation, but there are dozens of ETFs that may be useful for those worried about the impact of rising prices on their portfolio. Below, we profile 25 different ETFs that may have appeal as tools to fortify portfolios against inflation [for more ETF insights, sign up for the free ETFdb newsletter]:
1. IQ Real Return ETF
Unlike most of the ETFs on this list, CPI doesn't offer exposure to a single asset class; it uses a more complex strategy to combine various types of securities in a manner that will result in protection against the potentially adverse impact of inflation.
This ETF is structured as a fund of funds, investing in a number of different ETFs with the objective of providing a hedge against inflation by delivering a real return above the rate of inflation as represented by the Consumer Price Index (CPI). To do this, CPI generally uses a core holding in short-term bonds complemented by positions in other asset classes, potentially including gold and other commodities, emerging market stocks, and currencies. The component ETFs are selected based on a proprietary methodology, and can shift regularly based on movements in measures of inflation and other observable price signals [see Inflation-Proofing Q&A].
2. WisdomTree Real Return Fund (RRF)
RRF is the newest active ETF from WisdomTree, designed to deliver a comprehensive approach to combating inflation. The majority of the RRF portfolio consists of inflation-protected bonds, but this product goes beyond U.S. borders to include debt from issuers in developed and emerging international markets as well. To complement the position in inflation-linked bonds, RRF also includes commodities; that segment of the portfolio includes both long/short, traditional long, and gold exposure.
As such, RRF offers a multi-pronged approach to protecting asset values from the potential ravages of inflation. This ETF is a fresh addition to the ETF lineup, so the track record is somewhat limited [see Inside RRF].
3. Floating Rate Note Fund (FLOT)
Fixed-rate debt can be hurt by interest rate hikes, which typically accompany any upswing in inflation. But because floating rate debt resets the effective coupon payments on a regular basis, this asset class can be attractive for those looking to avoid interest rate risk and adjust coupon payments received with changes in inflation. Floating rate debt will often increase the nominal yield along with inflation, meaning that investors can still achieve a real return. Investors holding fixed rate debt, on the other hand, may see the rate of inflation eclipse the coupon payments on their debt, meaning that the real return offered has gone negative.
FLOT is designed to measures the performance of U.S. dollar-denominated, investment grade floating rate notes. The fund allocates the majority of its holding in domestic bonds and notes, while exposure to foreign debt is also included and accounts for about one third of total holdings.
4. Barclays TIPS Bond Fund
The iShares Barclays TIPS Bond Fund is the easily the most popular option in the Inflation-Protected Bonds ETFdb Category. TIPS are a popular inflation-fighting tool since they are extremely low-risk, given that they are backed by the U.S. government, and since their par value rises with inflation (as measured by the Consumer Price Index). Additionally, the interest rate for TIPS remains fixed, while interest is paid semiannually and is exempt from state and local income taxes. When a TIPS matures, the noteholder is paid the adjusted principal or the original principal, whichever is greater.
TIP gives investors broad-based exposure across multiple time-frames as the fund includes all publicly issued, U.S. Treasury inflation-protected securities that have at least one year remaining to maturity. In theory, TIPS are a fool-proof way to beat inflation, however, many experts emphasize the very short performance history of these securities along with other potential drawbacks [see TIP: Silver Bullet or Steel Trap?].
5. PIMCO 1-5 Year U.S. TIPS Index Fund (STPZ)
As described above, TIPS are a popular tool used by investors in defending their portfolios against inflation. Many investors, however, fail to consider the impact that in increases in interest rates will have on TIPS, and especially government notes with a longer time to maturity. Once the Federal Reserve raises interest rates, investors will likely gravitate from the fixed-income corner of the market to the more lucrative equity side.
STPZ offers more targeted exposure than TIP, focusing on the short end of the maturity curve. Because holdings have a remaining maturity of between one and five years, STPZ will generally offer lower yield but will also feature less in the way of interest rate risk. Long-term bonds will likely get hit the hardest once the Fed starts raising rates, meaning that this feature can be valuable in inflationary environments. The downside of STPZ, however, is that the fund currently offers a puny 1.08% yield to maturity.
6. International Government Inflation Protected Securities Fund
The majority of investors interested in inflation-linked bonds generally only consider U.S. securities, but expanding internationally may bring both diversification and return enhancement benefits. Inflationary pressures kick in a different times across the various economic regions around the globe, and thus an international-defense against inflation is more appropriate for investors interested in building a truly diversified portfolio. For example, India is currently tightening its monetary policy because inflationary pressures there are far more pressing than current conditions in the United States.
WIP gives investors exposure to inflation-linked government bonds from developed and emerging market countries outside of the United States. This ETF currently yields a modest 2.85%, which is far more lucrative than U.S. TIPS funds.
7. iShares Global Inflation Linked Bond Fund (GTIP)
As the name suggests, this ETF offers exposure to the global TIPS market. Investors who are weary of holding entirely domestic or international TIPS should consider GTIP, as the fund offers broad-based exposure to inflation protected securities from both the U.S. and foreign countries. Top holdings by country outside of the United States include United Kingdom, France, and Brazil.
GTIP recently had an average real yield to maturity of 1.34% and a weighted average maturity of about 11 years.
8. Emerging Markets Metals & Mining Index Fund
Commodities are an essential asset class for fending off inflation since the prices of raw materials tends to increase rather quickly as the U.S. dollar loses value. Likewise, holding commodity producers is also a viable tactic for fighting inflation since their profitability is greatly impacted by the prevailing market price of their goods. In essence, when resource prices rise, commodity producers tend to see profitability rise as well since they can sell their goods at a higher price (and since upward pressure on wages generally lags jumps in raw materials).
EMT provides exposure to the largest publicly-traded mining companies involved in industrial and precious metals exploration, extraction and production within the emerging world. Top allocations by country include China, Russia, South Africa, Brazil, and India. Although there are a number of ETFs in the Commodity Producers Equities ETFdb Category, EMT is the only one focusing exclusively on emerging markets.
9. COMEX Gold Trust
Gold is one of the most popular inflation hedges because the precious metal has historically shown strength when the dollar encounters weakness (devaluation), and physical exposure also serves as a store of value that tends to perform well in inflationary environments. Gold is also considered a "safe haven" asset class, much like U.S. Treasury Bonds, which means that it attracts investment inflows when equity markets are uncertain and plagued with volatility.
IAU is the cheapest gold ETF within the Precious Metals ETFdb Category, charging a mere 0.25% (the category average is more than double, at 0.55%). The ultra-popular GLD, as well as AGOL and SGOL, are other options for physically-backed gold ETF exposure.
10. Global X Pure Gold Miners ETF
Another option for achieving exposure to gold involves investing in the stocks of companies engaged in the extraction and production of the yellow metal. The profitability of these companies should rise along with gold, making this asset sub-class yet another option for combating inflation. Assuming that gold will perform well when inflation accelerates -- which is not necessarily guaranteed -- gold miners should deliver solid returns.
GDX is a much more popular option for gaining exposure to gold miners, however the fund invests in a number of companies that derive substantial portions of revenues from silver, whereas GGGG's holdings are almost exclusively focused on gold.
11. United States Commodity Index Fund
Commodities have obvious appeal to protecting against inflation; broad-based natural resource exposure can provide access to an asset class that should perform well in such environments. USCI is one of several ETFs in the Commodities ETFdb Category that offers exposure to a basket of futures contracts. Unlike many competing products, USCI uses a screening methodology to select contracts that focuses on the severity of contango and backwardation in futures markets, potentially enhancing returns over the long run by avoiding assets that are facing strong headwinds.
12. Market Vectors Hard Assets Producers ETF
Some investors would prefer to avoid futures-based strategies for commodity exposure, achieving access instead through companies involved in the production of basic materials and hard assets. Similar to gold miners, commodity-intensive companies may see their outlooks improve when natural resource prices begin to rise. Instead of focusing on a narrow segment of commodity producers, HAP casts a wider net; the portfolio includes miners, agribusiness stocks, and oil and gas producers [see Commodity Prices and Inflation: What's the Connection?].
HAP has over 300 holdings, offering excellent broad-based exposure to a basket of commodity-intensive companies from around the globe. Other options for similar exposure include GNR, which offers similar exposure for lower fee.
13. IQ Global Resources ETF (GRES)
GRES is unique among the ETFs offering exposure to Commodity Producers because it includes sectors such as timber, water, and coal that aren't found in many similar products. This fund also includes short exposure to global equities as a partial equity market hedge, a compelling feature that helps to isolate the returns realized by commodity-intensive companies attributable to movements in raw materials prices (as opposed to factors that impact broader equity market performance). Top five allocations by country are U.S., United Kingdom, Canada, France, and Australia [see ETF Ideas for Contango Free Commodity Exposure].
14. Guggenheim Timber ETF
When considering possible inflation hedges from the lineup of available commodities, timber probably isn’t the first resource that comes to mind. However, historical evidence suggests that timber can serve as a formidable hedge against rising prices. For example, during America's last major inflationary period, from 1973 to 1981, inflation averaged just above 9% annually, while timberland values increased by an average of 22% per year.
CUT can be a useful tool in protecting against inflation while also improving overall portfolio diversification since this asset class bears low correlation with general equity markets. Note that CUT doesn't invest directly in timber, but rather in timber companies [see CUT holdings].
15. Barclays 1-3 Year Treasury Bond Fund
As mentioned previously, short-term Treasuries are at the core of QAI's inflation-fighting technique. That's because this asset class generally serves as a proxy for the rate of inflation, delivering a small real return to investors. SHY, which measures the performance of 1-3 year U.S. Treasury securities, can serve as a great tactical tool for fighting inflation in the short run.
16. SPDR S&P Oil & Gas Exploration & Production ETF
XOP allows investors to establish an oil-intensive defense offering exposure to companies in the oil and gas exploration and production sector. If inflationary pressures push oil prices up, companies with operations focused on producing this key commodity could see a boost in top line revenue (and bottom line earnings).
Similar to funds such as HAP and GGGG (profiled above), this ETF effectively gives investors indirect exposure to commodities -- an asset class that can come in handy when inflation pops up.
17. PowerShares DB US Dollar Index Bearish (UDN)
A depreciating greenback makes it more expensive to import goods and services, which in turn contributes to an uptick in prices at home. Investors may choose to protect their portfolios by betting against the performance of the U.S. dollar relative to other developed currencies, anticipating that the relationship between these two factors will weigh on the U.S. currency.
UDN offers short exposure to the dollar relative to a basket of developed market currencies including the euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc. Currently this fund is allocating close to two-thirds of total assets to short the dollar versus the Euro.
18. ProShares UltraShort 20+ Year Treasury
Long-term bonds perform poorly in inflationary environments since interest-rate hikes make existing debt less appealing, given that more attractive yields can be realized through freshly-issued debt securities. Thus, investors may choose to short longer-term Treasuries in anticipation of rising interest rates. Investors who don't have access to a margin account, which is required for shorting securities, should consider offerings in the Inverse Bonds ETFdb Category.
TBT is one of the most popular products on the market which allows investors to gain leveraged inverse exposure to U.S. treasuries that have a remaining maturity of at least 20 years.
19. Guggenheim ABC Dividend ETF
Investing in commodity-intensive economies offers investors the potential to gain inflation-fighting benefits while also improving overall portfolio diversification with international equity exposure. ABCS holds about 30 securities spread across Australia, Brazil, and Canada, and the underlying index selects its holdings by picking the highest yielding companies in each country. So this ETF combines two concepts that might be appealing in inflationary environments: dividends and commodity-intensive economies.
20. PowerShares Senior Loan Portfolio (BKLN)
Exposure within the fixed-income corner of the market is very sensitive to interest rates and coupon payments received by investors loose their value as rates rise. Investors can protect against deterioration of their current-income streams by investing in floating-rate debt securities, which simply adjusts payouts as rates change. BKLN is designed to track the market-weighted performance of the largest institutional leveraged loans based on market weightings, spreads and interest payments. Investors should be aware that the majority of BKLN's holdings are rated BB or lower and have a maturity of seven years or less.
21. WisdomTree Commodity Country Equity Fund (CCXE)
CCXE is somewhat similar to ABCS, in that it provides exposure to stocks in commodity-intensive economies. However this ETF features more broad-based exposure to a greater number of countries rich in natural resources. CCXE follows a fundamentally weighted index that measures the performance of dividend-paying companies from commodity countries selected from the WisdomTree Global Dividend Index. The fund currently allocates roughly 12% to Australia, Brazil, South Africa, Chile, Russia, Canada, New Zealand, and Norway.
22. WisdomTree Dreyfus Commodity Currency Fund
Historically, currencies of commodity-producing currencies have exhibited increased sensitivity to global growth levels; during economic booms demand for raw material surges, sending both the prices of the commodities and value of related currencies higher. But these currencies have also held up relatively well during periods of slumping commodity prices, losing value in only about a third of "down" commodity quarters.
CCX seeks to match total returns reflective of money market rates in selected commodity-producing countries and changes to value of such countries' currencies relative to the U.S. dollar. The fund include exposure to the Brazilian real, Chilean peso, Russian ruble, South African rand, Australian dollar, Canadian dollar, Norwegian Krone, and New Zealand dollar.
23. SPDR Barclays Capital Short-Term International Treasury Bond ETF
BWZ is the international alternative to SHY, as this fund measures the performance of fixed-rate local currency sovereign debt of investment grade countries outside the United States that have remaining maturities of one to three years. For investors who believe that short-term bonds should be at the core of an inflation-fighting strategy, this ETF offers a way to extend exposure beyond U.S. borders.
BWZ recently had a yield to maturity of 2.05% and a modified adjusted duration of about 1.8 years.
24. iPath Dow-Jones UBS Coffee ETN
Coffee is one the world's most traded commodities and a popular dietary component for consumers from across the globe. But it may also have appeal as an inflation hedge; there is some evidence to suggest that coffee is one of the more effective commodities that can be used in inflationary environments. Make it an attractive global good that can serve as a reasonable hedge against inflation.
JO is an ETN that offers futures-based exposure to coffee; as such, investors should note the potential credit risk components and the potential for returns to deviate from a hypothetical spot investment. The more recently-launched CAFE also presents an option for exposure to this commodity.
25. Teucrium Corn Fund
Corn is easily one of the most consumed commodities in the world, and the crop actually makes for a decent inflation hedge as well. That shouldn't be all that surprising, since food prices tend to be among the earliest to begin heading higher when inflationary environments materialize.
Teucrium's CORN is currently the only fund that exclusively offers exposure to corn futures. And unlike most of products out on the market, CORN won’t invest exclusively in near month contracts; assets will instead be split between second-to-expire futures (35%), third-to-expire futures (30%), and futures expiring in the December following the expiration month of the third-to-expire contract (35%).
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Disclosure: No positions at time of writing.
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