CHICAGO – Bracing a portfolio for what seems like an inevitable inflationary environment down the road was one of the main topics coursing the halls of this year’s Morningstar ETF conference held here in the Windy City this week. That, and finding a little bit of extra yield wherever possible.
Money managers, ETF sponsors and index providers alike seemed to agree that the Federal Reserve’s latest round of quantitative easing announced in September did all but ensure that inflationary pressures will creep up sometime in the future.
Inflation can erode returns in any portfolio, and investors who have lived through the collapse of 2008 and its volatile aftermath now have to start seriously thinking about protecting themselves against inflation. Many, some advisors noted, have already been voicing their concerns.
The good news is that in today’s vibrant ETF market, investors have at their disposal more tools than ever before that enable them unprecedented access to various assets to express their views on the Fed’s ability to manage inflationary pressures.
But the secret could be in strategic and tactical allocation to real assets known as inflation hedges, such as commodities, real estate, inflation-protected bonds, currencies—including gold—and even equities linked to commodities, a panel of industry heavyweights told a room full of advisors, ETF sponsors and other attendees at the Morningstar conference on Thursday.
“The conditions are set for inflation, given all the liquidity the Fed has pumped into the market,” State Street Global Advisors’ Chris Goolgasian said. “But expectations for inflation are still constrained for now.”
Still, Goolgasian stressed that: “You need to buy insurance for that [inflationary] future, and real assets can give you that insurance.”
For now, however, the muted inflationary expectations will allow the Fed to continue doing what it’s doing, and that is expanding its balance sheet as it focuses on reinvigorating the jobs market.
Echoing Goolgasian’s cautionary recommendations, the well-known currency investor Axel Merk said the added liquidity in the financial system will most likely lead to inflation.
“All of investing is about beating inflation in a way,” Merk said. “But the most important thing is for you to have a vision of the world.”
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