Inflation Frontier: 3 ETFs to Gain Returns During Inflation

By | February 5, 2014

Investors have always been concerned about inflation, especially with sudden soaring prices. Inflation can drain your returns at an alarming level and the best way to manage risk is to prepare your portfolio with inflation in sight. You can start by creating ample provisions against inflation and reduce any surprise factors. However, there have always been questions against the bonds and securities used to safeguard against inflating economy. There are a dozen strategies out in the market; however, none of these strategies stands perfect against different types of inflationary environments.

Inflation Frontier: 3 ETFs to Gain Returns During Inflation

Inflation Frontier: 3 ETFs to Gain Returns During Inflation

There are no silver bullets to safeguard against inflation. However, some ETFs can help you maintain healthy returns during an inflated economy. Most of the financial experts suggest a diversified strategy that can maintain proper returns as well as protection for your investment.

How to safeguard against market inflation?

A multi-asset strategy is the only way out of inflation and it involves a balanced proportion of equities, bonds, and commodities. Commodities are always priced in USD, which means weaker USD can lead to commodity price hike. Some commodities benefit from inflation and help achieve better returns. You can choose stocks that are in direct proportion with inflation such as energy. The main building block of an inflation-protection strategy includes government securities backed bonds. Experts suggest a proper mix of exchange-traded funds and commodities (exchange-traded commodities).

Top 3 ETFs to safeguard against inflation

Some ETFs can help your investments hedge against inflation and gain average returns in an inflated economy.

  1. IQ Real Return ETF (CPI): CPI is a combination of different securities instead of any particular asset class and this combination offers protection against market inflation. It is categorized as a fund of funds and it delivers returns above inflation rate indicated by Consumer Price Index (CPI). IQ Real Return ETF comprises of a core holding in best inflation protection tools i.e. short-term bonds. It has some additional investments in commodities (gold), currencies, and stocks in the emerging market. The ETFs are chosen according to the rate of inflation and other market indications.
  2. Barclays TIPS Bond Fund (TIP): Barclays TIPS Bond Fund is the most popular ETF to hedge against inflation because of the low-risk assets comprising this bond. In addition to it, the U.S. Government backs this ETF and the par value of TIPS tends to rise with inflation. This ETF comes with a fixed interest rate and the interest is exempted from any state or local income tax claims. On maturing of TIPS, the original or adjusted principal (whichever is higher) is paid to the note holder. It comprises of U.S. Treasury securities with inflation protection and a minimum of one year left before maturing. The best part of investing in TIP ETFs is that the government guarantees the face value of bonds comprising the fund, which means that even during lowering inflation, you won’t receive negative returns with this ETF.
  3. Floating Rate Note Fund (FLOT): With the auction of floating-rate notes (FRNs) by the Treasury, it might help to invest in this ETF during inflation. Interest rate hike is dangerous for the fixed rate debt; however, floating rate debt follows effective coupon payments and adjusts them as per the inflation/interest hike. If you are planning to hedge against interest rate hikes, FLOT is the best option for you. With a rise in inflation, floating rate note fund will increase the yield leading to positive returns. A majority of the holdings of Floating Rate Note Fund are in domestic bonds and notes along with foreign debt exposure.

If you are investing a significant amount of your savings, then it might help to consider these ETFs during higher inflation. Unlike long-term government bonds and equity investments, your money will offer positive returns or at least will not downsize with the market.

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