Inflation is on the rise in 2021.
There is a lot of talk about inflation in 2021 as fears of high government spending creep in and the recent rebound in prices from pandemic-related levels has some investors worried that the trend will continue for some time. However, it’s important to note that March’s jump of 2.6% in consumer prices is not something that’s going to bankrupt any of us. The annual rate of inflation in 2011 was 3% — and that was a tremendous year for both the U.S. economy and the stock market. It’s also worth noting that from 2000 up until the financial crisis of 2008, inflation topped 3% four times, so this is hardly a record-breaking pace. That said, it’s undeniable that many investors have inflation on their mind these days. So here are a handful of exchange-traded funds, or ETFs, to consider if you’ve got an eye on inflation risks.
iShares TIPS Bond ETF (ticker: TIP)
Treasury inflation-protected securities, or TIPS, are a unique asset that provide protection against inflation because the principal value actually increases with inflation. That’s thanks to being benchmarked to the consumer price index, a widespread measure of how fast prices are rising and one of the key metrics watched by policymakers at the Federal Reserve. The downside here is that while the “face” value of a bond can go up when inflation rises, there’s no guarantee this will happen — and without that rise in principal value, you’re stuck with an asset that yields much less than conventional bonds. Right now, this iShares fund has a 12-month yield of just 1.1%. So keep in mind that while TIPS are an insurance policy against inflation, if rising prices don’t transpire, then you won’t see much growth in your nest egg.
iShares Gold Trust (IAU)
Gold investments remain one of the go-to assets for many investors to hedge volatility and reduce risk. This includes the risks caused by inflation, as physical gold naturally rises in value as other goods and services become more costly. The iShares Gold Trust offers direct exposure to the day-to-day movement of the price of gold bullion. It’s a massive $30 billion fund, but it boasts one of the most affordable fee structures among gold ETFs — just 0.25% in annual expenses, or $25 for every $10,000 invested. This is much cheaper than storing, shipping and insuring physical gold bars in your home.
Vanguard Real Estate ETF (VNQ)
Another popular investment to fight rising prices is real estate. Similar to gold, we typically see property prices increase as inflation lifts many other categories. As a result, landlords typically also increase their rates on both commercial and residential real estate. VNQ is one of the largest and most liquid real estate ETFs out there, with $38 billion in assets under management. It boasts a wide array of related companies, including telecom property operator American Tower Corp. (AMT), warehouse giant Prologis (PLD) and mall owner Simon Property Group (SPG), among others.
Invesco DWA Basic Materials Momentum ETF (PYZ)
When inflation causes rising prices, what better way to cash in than to rely on the stocks that provide ever-more-expensive raw materials to end users? That’s what this Invesco ETF does, with a portfolio of about 30 total stocks in the materials sector that are hand-picked based on their share price momentum and other fundamentals. Admittedly, this is a small ETF, with only about $150 million in assets under management, and many of the names are decidedly old-school in their focus. With stocks like mining giant Freeport-McMoRan (FCX) and United States Steel Corp. (X), it’s easy to see how inflation could mean better pricing power for this focused list of stocks.
Technology Select Sector SPDR Fund (XLK)
When inflation rises, there are a number of industries that suffer as input costs go up. However, one sector that is decidedly insulated from this is information technology. Particularly for megastocks like Google parent Alphabet (GOOG, GOOGL) and Facebook (FB), the commodity they provide is simply lines of code and not a tangible good that is affected by inflationary trends. The same even holds true for Amazon.com (AMZN), which, while exposed to rising prices in its e-commerce operations, has the luxury of a very profitable Amazon Web Services arm that will remain a cash cow. Some of the prior investments could profit via inflation, but tech stocks in XLK are pretty insulated from the trend even if they may not cash in. These include names such as PayPal Holdings (PYPL) and Cisco Systems (CSCO).
Vanguard Total Stock Market ETF (VTI)
While tech stocks are insulated in the short term from any inflationary trends, it’s worth remembering that the stock market as a whole tends to do OK in the long run across times of elevated inflation. That’s because things mostly even out — higher prices that may eat into consumer wallets can help financial stocks that charge higher interest rates, or sellers that can command better pricing power. This Vanguard ETF represents the entire stock market in one single fund, with roughly 3,500 total holdings and a rock-bottom expense ratio of 0.03%. If you’re a “buy and hold” investor, this is the simplest way to ensure you share in the long-term upside of the stock market — regardless of short-term inflationary pressures.
Invesco CurrencyShares Euro Trust (FXE)
If you aren’t convinced by any of these U.S.-focused hedges or growth opportunities, there’s one last idea to avoid any potential pain caused by inflation — rely on another nation’s currency instead of the greenback. After all, when a significant bout of inflation rears its head, it’s usually a bad thing for the local currency. If you fear significant or long-lasting inflation that could erode the purchasing power of the U.S. dollar, then this Invesco ETF provides exposure to the euro as a hedge against these currency risks. It has more than $250 million in assets and is reasonably popular with those who play forex markets, but keep in mind that the ETF is basically flat over the last five years. After all, the euro may not necessarily go up significantly to outperform the dollar regardless of inflation prospects.
Seven ETFs for inflation:
— iShares TIPS Bond ETF (TIP)
— iShares Gold Trust (IAU)
— Vanguard Real Estate ETF (VNQ)
— Invesco DWA Basic Materials Momentum ETF (PYZ)
— Technology Select Sector SPDR Fund (XLK)
— Vanguard Total Stock Market ETF (VTI)
— Invesco CurrencyShares Euro Trust (FXE)
More from U.S. News