The 2022 bear market may be in the rearview mirror for many investors now, but the ugly specter of inflation isn’t quite gone just yet. The latest consumer price index, or CPI, report on April 12 showed a 0.1% increase for the month of March, for a 5% increase year over year.
“Thankfully, inflation has come down from its peak last year, but it still remains well above the Federal Reserve’s long-term target of 2%,” says Christopher Huemmer, senior investment strategist at Northern Trust Asset Management. “The pace of how fast inflation falls over the rest of this year will have a profound impact on not only interest rates, but also financial markets and overall economic growth.”
Defined as an increase in the price of a general basket of goods and services over time, inflation can wreak havoc on consumers, who lose purchasing power when the price of food, utilities and energy increase steadily. It can also negatively impact the value of one’s investments as the underlying companies suffer consequences as well.
“When inflation rises above the level of maybe 2 or 3 percent, the demand slows for goods and services,” says Jim Penna, manager of retirement services at VectorVest Inc. “This slows business for companies, which will eventually be reflected in their stock price.”
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“During inflation, businesses can also experience a loss of purchasing power and declining margins,” says Will Stark, managing director of private wealth services at Howard Capital Management. “In addition, a loss of consumer demand could reduce the value of their share price, assets and investments.”
The good news is that investors can overweight certain assets as a potential hedge or shield against inflation.
“There are several different asset classes that have demonstrated a historical correlation to the CPI that can be helpful in protecting a portfolio from this wealth erosion,” Huemmer says.
Because some of these assets can be illiquid or difficult to access on their own, investors can make use of exchange-traded funds that can offer more affordable, transparent and liquid exposure. Moreover, investors can combine different inflation-resistant ETFs to make portfolios even more resilient.
“Investors need to be aware that there is no single asset class or ETF that can provide universal inflation protection on its own,” Huemmer says. “This is why we recommend considering at least three different buckets for inflation protection focused on short-term, intermediate-term and long-term windows.”
The following seven ETFs offer exposure to a variety of inflation-resistant assets, which include precious metals, commodities, consumer staples, infrastructure, energy stocks and Treasury inflation-protected securities, or TIPS:
| Inflation-Resistant ETF | Expense Ratio |
| Franklin Responsibly Sourced Gold ETF (ticker: FGLD) | 0.15% |
| iShares Global Infrastructure ETF (IGF) | 0.4% |
| Vanguard Short-Term Inflation-Protected Securities ETF (VTIP) | 0.04% |
| FlexShares STOXX Global Broad Infrastructure Index Fund (NFRA) | 0.47% |
| Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC) | 0.59% |
| FlexShares Morningstar Global Upstream Natural Resources Index Fund (GUNR) | 0.46% |
| Vanguard Consumer Staples ETF (VDC) | 0.1% |
Franklin Responsibly Sourced Gold ETF (FGLD)
“Gold can be used in portfolios to preserve purchasing power, reduce portfolio volatility and act as a potential hedge against long-term inflation,” says David Mann, senior vice president and head of ETF product and capital markets at Franklin Templeton. “Due to gold’s historically low-to-negative correlation with stocks and bonds, it can also serve as a potential portfolio diversifier.”
For not only affordable but also socially and environmentally conscious exposure to gold in a brokerage account, investors can buy FGLD. This ETF holds physical gold bullion sourced from accredited refiners that have demonstrated efforts to combat environmental damages, money laundering, terrorist financing and human rights abuses. The ETF charges a 0.15% sponsor fee, also called an expense ratio, which works out to $15 annually on a $10,000 investment.
iShares Global Infrastructure ETF (IGF)
“Physical infrastructure assets, like transportation projects, electricity, water, sewage, communications and renewables, can allow for inflation impacts to be passed through to users,” says Charles Hamieh, managing director and senior portfolio manager at ClearBridge Investments.
For a broadly diversified bet on infrastructure assets, investors can buy IGF, which tracks 75 utility, transportation and energy companies represented by the S&P Global Infrastructure Index. IGF ended the 2022 bear market with a minor negative 1% total return with dividends reinvested, showing its relative resilience to inflationary conditions. The ETF charges a 0.4% expense ratio.
Vanguard Short-Term Inflation-Protected Securities ETF (VTIP)
“TIPS are a type of government bond that is designed to protect investors from inflation by adjusting the bond’s principal value to keep pace with inflation,” Penna says. If inflation suddenly increases, TIPS can provide protection against this shock thanks to appreciation in the bond’s share price and higher coupon payments, making them unlike regular bonds.
Another benefit of TIPS is their virtually non-existent credit risk. As a type of government-issued Treasury, TIPS are highly unlikely to default. A great way to access a portfolio of short-term TIPS is via VTIP. With an average duration of 2.4 years, VTIP is only expected to lose 2.4% in value if interest rates rise by 1 percentage point, all else being equal. The ETF charges a low 0.04% expense ratio.
[SEE: 7 High-Yield ETFs for Income Investors]
FlexShares STOXX Global Broad Infrastructure Index Fund (NFRA)
“For long-term inflation protection, we stress that investors should think globally when choosing from the respective asset classes,” Huemmer says. “An ETF like NFRA, which offers exposure to a wide array of mission-critical infrastructure assets like utilities, pipelines and airports, to data centers and cellular tower REITs, could therefore be an attractive investment.”
NFRA tracks the STOXX Global Broad Infrastructure Index, which currently holds 214 infrastructure companies from around the world. The top holdings in NFRA include assets like Canadian railways, U.S. telecom providers, North American pipelines and European utility services. The ETF charges an expense ratio of 0.47% and pays a 30-day SEC yield of 2.7%.
Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC)
One of the most direct ways to hedge against short-term inflation is to invest directly in the commodities that act as inputs in its calculation. Rather than stockpiling barrels of oil and bushels of wheat in a storage shed, investors can buy ETFs like PDBC, which derive synthetic exposure to broad commodities via a portfolio of futures contracts.
Currently, PDBC tracks an index of 14 heavily traded energy, precious metals, industrial metals and agriculture commodities. Because the ETF uses derivatives for exposure, it is pricier than normal equity ETFs, with a 0.59% expense ratio. PDBC’s unique structure also allows investors to forgo filing a schedule K-1 form come tax time, which makes it less of a hassle to hold than regular commodity pools.
FlexShares Morningstar Global Upstream Natural Resources Index Fund (GUNR)
“While commodity spot prices historically have had strong linkages to inflation, they are just one aspect of the total return of a commodities futures contract,” Huemmer says. “Negative roll yield or contango, which is the cost of moving from one expiring futures contract to the next when prices are higher, can negatively influence the performance of commodity futures ETFs.”
Commodity producer ETFs, which hold the stocks of natural resource companies, are an alternative to commodity futures ETFs. An option here is GUNR, which concentrates on companies in the upstream portion of the global energy supply chain. Thanks to its large holdings of global energy stocks, GUNR is currently paying a decent 30-day SEC yield of 3.9%. The ETF charges a 0.46% expense ratio.
Vanguard Consumer Staples ETF (VDC)
While most businesses will feel the squeeze of inflation from rising cost of goods and services that erode their margins, some sectors fare better. Notably, the consumer staples sector tends to be somewhat inflation resilient. Thanks to the essential, evergreen nature of their products, these companies can pass on cost increases to customers without impacting demand too much, thus preserving profitability.
For a low-cost way of passively investing in a portfolio of around 100 U.S. consumer staple stocks, investors can buy VDC. This ETF tracks the Spliced U.S. Investable Market Consumer Staples 25/50 Index, which includes top holdings like Procter & Gamble Co. (PG), Coca-Cola Co. (KO), PepsiCo Inc. (PEP), Costco Wholesale Corp. (COST) and Walmart Inc. (WMT). VDC charges a 0.1% expense ratio.
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7 of the Best ETFs to Fight Inflation originally appeared on usnews.com
Update 04/19/23: This story was previously published at an earlier date and has been updated with new information.
