While it seems the cost of the things we use every day is always increasing, the reality is that prices for consumer goods and services ebb and flow over time and for a variety of reasons. In times like today, inflation has hit almost historical levels and the impact of those rising prices has been overbearing.
The good news is there are investments that have been designed to counteract inflation. These “inflation protected securities” are used to provide positive returns during periods where inflation is causing other asset classes to perform poorly. And by doing so, inflation-protected securities can help smooth out the volatility in a portfolio.
There are other investments that just perform better than others when inflation is running hot. These are traditionally used to participate in and counteract rising inflation.
Following are a few ETFs designed to help offset persistent inflation.
The most well-known type of inflation-protected securities are commonly referred to as TIPS, or Treasury inflation-protected securities. TIPS are a type of fixed income security or bond. While bonds typically pay investors a set amount of interest each year and then pay back the face value of the bond at maturity, TIPS are a little different.
Their principal—the face value of the bond—increases when the Consumer Price Index rises, and decreases when it declines. But they pay off their original face value or more at maturity. They pay a set interest rate, but interest payments vary because they are based on the fluctuating face value of the securities.
TIPS have, since their introduction, been sought after during times like these. But there is risk. And that is that they can and will underperform other fixed income asset classes if inflation moderates.
When considering the daily lives of Americans, there are few commodities that hurt the wallet more immediately than the price of crude. We need it to drive to work and to heat our homes. And it is a critical component to many products we use on a daily basis. Rising oil prices often affect us in ways we’re not always aware of.
While investors can buy oil stocks to benefit from the rising price of oil, a more direct way is with an ETF like USL. This ETF is benchmarked to a basket of West Texas Intermediate crude oil futures contracts that expire in each of the next 12 consecutive months.
Now, this won’t necessarily protect investors from the day-to-day fluctuations in oil prices, but it will allow them to participate over time if prices continue to rise. Of course, the opposite is true as well. If, and hopefully when, oil prices decline and return to something more normal, the risk of loss here can be significant. But if an investor thinks oil will continue to rise, USL is a good way to participate and profit from further price increases.
Gold is a very popular investment and inflation hedge, and the SPDR Gold Trust ETF is the granddaddy of all gold ETFs. Gold is traditionally considered a store of value especially during periods of weakening currencies and rising inflation. And it is a very appealing way to benefit from gold ownership. Investors may find buying the hard asset itself daunting with its recent per ounce price reaching $2,000. GLD offers investors the opportunity to benefit from the performance of gold with a much lower barrier to entry.
STGF is interesting in that it “provides exposure to investments that are expected to benefit, either directly or indirectly, from persistent inflation, including in an environment of weak economic growth (stagflation).”
This fund’s benchmark is the Solactive Stagflation Index (SOLSTAGF), which STGF seeks to replicate as closely as possible. That index, and therefore STGF, seeks to track the performance of investments that are expected to benefit from persistent inflation, including in an environment of weak economic growth (stagflation).
Now, we’ve been hearing the term “stagflation” passed around a lot lately, which brings back memories of the late 1970s. Whether or not we enter a true stagflation environment remains to be seen, but STGF looks like a fund to put on your list, just in case.