The reason for a multi-asset class approach is that inflation can be experienced in a variety of ways. The most well-known is the general rise in prices as measured by the consumer price index (CPI)—too many dollars chasing too few goods. There also exists commodity-driven inflation, which can be more transitory, yet still impact everyday consumers. Finally, asset price inflation has been the byproduct of quantitative easing here in the U.S., impacting the prices of investments such as equities, bonds and real estate.
To develop the history of price pressure more carefully, the chart below highlights six distinct periods of rising inflation.
Examining these periods, a quick analysis of the performance across several major asset classes reveals an important point. During each individual bout of inflation, performance varied across asset class. While commodities did well in some periods, stocks did better in others, and vice versa. This is largely a function of the various drivers behind each period’s uptick in inflation.
The implication here is significant; it calls for a more diversified approach to inflation protection. After all, it would be quite unfortunate for an investor to add protection to their portfolio only to have their hedge flounder because they took a singular view and simply chose incorrectly.
Inflation Protection Via ETFs
Within each asset class, our Real Return Strategy selects ETFs based upon their historical ability to keep pace during differing periods of inflation. The asset classes are rebalanced every three months to maintain equal exposures.
The largest holding in the equity portion of the portfolio is the Vanguard Dividend Appreciation ETF (VIG | A-77), which offers exposure to high-quality U.S. companies with a long history of raising dividends. Accompanying that is exposure to the broader U.S. market by way of the iShares S&P 500 Index ETF (IVV | A-99) and the PowerShares QQQ Trust Series ETF (QQQ | A-63).