These ETFs May Offer Protection From Inflation, With Some Caveats

However, those improvements in inflation weren’t enough to convince the Federal Open Market Committee (FOMC) to cut interest rates at its June meeting. In fact, the Fed’s updated dot-plot projection now calls for only one interest-rate cut this year—down from three estimated in March.

Thus, with inflation remaining relatively stable rather than declining, this is still an excellent time to discuss exchange-traded funds that offer inflation protection. Of course, a diversified portfolio addresses the inflation issue from multiple angles, such as via Treasury Inflation-Protected Securities (TIPS), commodities, gold, and stocks. Here are some potential options.

First up are TIPS, which are Treasury bonds whose face value is adjusted for inflation based on the CPI. As a result, many investors try to dive into these bonds when inflation rises. However, trying to time the market can end up being a fool’s errand.

Vanguard noted recently that many investors tend to move into TIPS at the wrong time. The performance of this type of Treasury is driven by both inflation expectations and interest-rate risk, which often results in unexpected situations. As such, sometimes TIPS can actually put up a negative performance during times of high inflation.

The value of owning TIPS lies in the protection from unexpected inflation shocks. At the same time, they capture the upside inherent when real yields in the bond market reach attractive levels. As a result, many investment advisors advocate maintaining an allocation to TIPS all the time. In most cases, by the time you can take action to buy a position, much of the greatest benefit has already been realized.

For an even better potential performance, a related option is to keep a hedged position that focuses your exposure on the breakeven-inflation risk that is the hallmark of owning TIPS.

One ETF option to throw into the mix is the iShares TIPS Bond ETF TIPS, which seeks to track the results of an index composed of TIPS.

Of course, gold gets plenty of attention during inflationary times. That’s largely due to its status as an inflation hedge and store of value. In May, gold did not disappoint, posting its third straight monthly gain by rising 2% month over month, according to the World Gold Council. That small gain reflected gold’s new record high of US$2,427 per ounce around mid-May.

In fact, central banks have been loading up on gold recently, further boosting the yellow metal’s price. The World Gold Council reported that central banks doubled down on gold demand during the first quarter, setting a new record for Q1 with net demand of 290 tons — the strongest start to a year ever recorded.

Interestingly, gold ETFs have seen mixed returns during these inflationary times. For example, the VanEck Merk Gold Trust ETF (OUNZ ) has been racking up inflows while the SPDR Gold Trust (GLD B) and the iShares Gold Trust (IAU B-) have notched outflows. One key difference is that OUNZ offers investors the ability to redeem their fund shares for physical gold.

This is important due to perceptions of growing gold scarcity. Many miners have either depleted the deposits they’ve tapped or are getting close to it, so being able to trade ETF shares for physical gold is of particular value, currently.

Aside from gold, commodities ETFs like the Invesco DB Commodity Index Tracking Fund (DBC A-) can also offer inflation protection. The ETF is designed for investors who are looking for a convenient and cost-effective way to invest in commodity futures. DBC is up 6% year to date and 7% over the last year as of June 24.

Finally, many investors are interested in stocks that offer inflation protection. However, it can be very challenging to pick the best the ones that are less affected by inflation. ETFs solve much of that problem via a diversified portfolio in a single security.

For example, the Horizon Kinetics Inflation Beneficiaries ETF (INFL B+) provides exposure to a selection of inflation beneficiaries. The ETF is up 5% year to date and 13% over the last year as of June 24. Its top holdings are Texas Pacific Land Corp., PrairieSky Royalty, and Wheaton Precious Metals.

Alternatively, the Fidelity Stocks for Inflation ETF (FCPI ) has returned 17% year to date and 29% over the last year. Its top holdings are Microsoft, Apple, and NVIDIA.

When trying to plan for macroeconomic factors like inflation and interest rates, it’s often a good idea to maintain certain positions consistently. This is largely because of the bouts of uncertainty that can materialize unexpectedly. Many of those positions are captured by ETFs. Of course, as with any other investment, it’s important to do your due diligence before diving into any ETF or other investments.

Charts via VettaFi PRO (formerly the LOGICLY platform)

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