Five “Inflation ETFs” To Hedge Against The Next Black Swan

by on August 20, 2009

Since the U.S. equity markets bottomed out in March, many key benchmarks have surged more than 30%, causing many pundits to declare that we have emerged from the recession and are now back on the path towards economic growth and national prosperity (although some disagree). The massive stimulus plans implemented by the U.S. government and other developed nations around the world, although highly controversial once upon a time, appear to have worked (at least in the sense that the “worst case scenario” feared by many has been avoided).

Will Hyperinflation Be The Next Black Swan?But there are many who fear that we are about to be blindsided by a post-recovery hangover, one stemming from the massive current debt levels and huge infusions of cash into our financial system. It is very likely that we have not yet paid the full price of the economic stimulus plans enacted last year, and that hyperinflation will soon rear its ugly head. While the CPI is widely expected to experience an uptick in the future, investors are divided as to when prices will begin climbing again. Some expect inflation to increase significantly by the end of 2009, while others believe that the time to pay the piper won’t be until 2010.

While an increase in inflation won’t necessarily be disastrous (rates have been relatively low lately, and deflation has even been a concern at times), the “black swan” scenario that some are predicting could irreparably harm the U.S. economy. Inflation of 20% is hard to fathom, but an epic meltdown of the financial sector also seemed like an impossibility once.

Here’s a look at five ETFs investors looking for protection from runaway inflation may want to consider:

  • iShares Barclays TIPS Bond Fund (TIP): Perhaps the best known inflation-protected ETF, TIP holds securities issued by the U.S. government that adjust their underlying principal (and therefore interim coupon payments) based on reported CPI. One drawback of TIP: since the value of its underlying holdings are based on reported CPI figures, to the extent that the government fudges inflation figures (which many believe is a common practice), returns on TIP might not fully keep up with inflation.


  • SPDR DB International Government Inflation Protected Bond ETF (WIP): WIP offers many of the benefits of TIP – it holds exclusively inflation-protected securities – but with the benefit of international diversification. The index underlying WIP measures total return on inflation-linked government bonds issued by developed and emerging markets. The UK (19%), France (19%), and Canada (6%) account for the largest country allocations.


  • SPDR Gold Trust (GLD): Gold, traditionally a popular safe haven during times of uncertainty, is also an effective inflation hedge. There are several gold ETFs on the market today, but GLD is by far the largest and most liquid. Its expense ratio of 0.40% compares favorably to other gold alternatives.


  • PowerShares DB U.S. Dollar Bearish Fund (UDN): UDN is based on a rules-based index comprised solely of short USDX futures contracts. The ETF is designed to replicate the performance of shorting the U.S. dollar against the the Euro, Yen, Pound, Canadian Dollar, Swedish Krona, and Swiss Franc. Although exchange rates are influenced by a number of factors, the U.S. Dollar would likely lose ground in a hyperinflationary environment, which would send UDN higher.


  • iPath Dow Jones-UBS Commodity Index Total Return ETN (DJP): DJP tracks an index based on futures holdings in a wide variety of commodities, including precious metals, livestock, base metals, and oil and gas. Although the correlation has been weak at times, commodities baskets generally perform well as inflation rises.


Disclosure: No positions at time of writing.