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Inflation is creeping up everywhere. Prices for gold, silver, oil, gasoline, food, even soft drinks are all creeping higher. You see it every day.
The one area where we aren’t seeing inflation is wages. With the U.S. unemployment rate at 9 percent (and much higher in some areas), few workers are seeing much growth in their paychecks.
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This is a dangerous blend. When the cost of living goes up and income doesn’t follow, people get squeezed. And unhappy people soon become restless and demand change. Just ask former Egyptian president Hosni Mubarak.
I’m not predicting riots or revolution here in the U.S. I am concerned, however, that our leaders in Washington don’t realize the danger they are creating with their free-spending, money-creating policies. They are walking a tightrope without a net.
So if inflation gets out of hand, how can you make the best of it?
ETFs are my top choice! You can quickly and easily build a well-balanced portfolio that protects you from the ravages of inflation — and could even let you profit.
Here are four groups of inflation-fighting ETFs you might consider …
ETF Inflation Fighter #1:
TIPS
Government bonds are usually one of the worst things you can own in an inflationary economy. But what if you could buy bonds whose principal automatically adjusts to keep up with inflation? Now you can — and you can do it through ETFs.
Treasury Inflation-Protected Securities, often called TIPS, are issued by the U.S. Treasury as well as some other national governments. The concept is simple: If an inflation benchmark like the Consumer Price Index goes up too fast, the bond’s value is given an extra boost. This keeps bond holders from losing their purchasing power.
Buying individual TIPS bonds is possible but impractical for small investors. ETFs are the better way for most people. Here are a few you may want to look at, based on your particular needs:
- SPDR Barclays TIPS ETF (IPE)
- iShares Barclays TIPS Fund (TIP)
- PIMCO Broad U.S. TIPS Index Fund (TIPZ)
- Schwab U.S. TIPS (SCHP)
- iShares Barclays 0-5 Year TIPS Bond Fund (STIP)
- PIMCO 1-5 Year TIPS Index Fund (STPZ)
- PIMCO 15+ Year U.S. TIPS Index Fund (LTPZ)
- SPDR DB International Government Inflation Protected Bond (WIP)
Incidentally, if you have a brokerage account at Fidelity you can buy and sell TIP without a transaction fee. Schwab customers can do the same for SCHP.
ETF Inflation Fighter #2:
Real Return Funds
A “real return” ETF is designed to give you just that: A “real” return when inflation rears its ugly head, and hopefully without making you take too wild a ride along the way. In investment-speak “real” means “inflation-adjusted.”
IQ Real Return ETF (CPI) tries to do this by allocating assets between various investment categories, which can include stocks, Treasury instruments, foreign currencies, and gold. Its goal is to outperform the U.S. inflation rate, as measured by the Consumer Price Index.
CPI is a fairly new ETF, and it’s not clear yet whether it will be able to achieve its objective. Nonetheless, I’m glad it is available and hope sponsors will offer more such funds.
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ETF Inflation Fighter #3:
Food and Agriculture
Been to the grocery store lately? Then you know food prices are high and getting higher. This is bad news for consumers, but good news for farmers, fertilizer makers, farm land owners, and quite a few other people.
ETFs give you a way to get aboard this trend and make back some of what you’re losing at the supermarket. See my column Profit from Rising Food Prices to learn more.
ETF Inflation Fighter #4:
Gold
I’ve talked about gold ETFs often in my Money and Markets columns. Rather than repeat myself again, I suggest you revisit Go for the Gold with Mining ETFs and Gold Isn’t All That Glitters in ETF Land.
Some Inflation
Fighters to Avoid
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Two other ETF groups may also benefit from inflation. But I’m concerned about some additional factors that could affect them. Real estate, for example, has historically been a great inflation hedge — and the more leveraged the better. However, since it was a housing bubble that got us into the current mess, I’m not sure we can count on real estate ETFs for help this time.
The second group is foreign currency ETFs of countries with lower inflation than the U.S. These ETFs should theoretically benefit if inflation makes the dollar decline. But as my colleague Bryan Rich just pointed out last week, the dollar may still be the “least ugly” world currency for some time to come.
As you can see there are plenty of ways to protect your assets from inflation. Look into them and be ready to act!
Best wishes,
Ron
{ 1 comment… read it below or add one }
Ron,
Good call on your recommendation for Agricultural ETFs. One thing, though. You mentioned that higher food prices is “bad news for consumers, but good news for farmers” (and others). This is generally not so for farmers.
While agricultural ETFs do very well when commodities rally, the sad truth is that farmers do not do very well, and the result can actually does more to fuel the rally short term.
If the rally continues until harvest time, the farmer will get a better price for his crop than he had planned. However, all through the growing season, he is also paying more for fuel, parts, fertilizers, etc., than he had planned, often going into debt because of the rally that will get him a higher price in the end. Often times, his profit windfall has already been gobbled up by the time he gets it and hands it over to the banks, the fertilizer, fuel, and tractor parts companies, and the seed companies for the next planting. Also, they may look at the rising costs and consider not even putting seed into the ground that year if they think the bubble will pop before harvest (as it did in 2008). This can feed the rally due to reduced future harvests.
I have friends who are farmers that struggle with these bleak issues and often don’t get what they should for feeding the world. I just wanted to stick up for them and set the record straight.