How To Fight Inflation With ETFs

Many market participants, including the Federal Reserve Board members, believe that inflation is coming. The questions at this point we would love to have answers to are, how bad will it be, will the Fed be able to control it, and how long will we experience a period of high inflation.

For years, the Federal Reserve has told us they wanted to see 2% or higher inflation, and for years we were below their benchmark goal. The Covid-19 Pandemic stimulus packages, combined with very low-interest rates and the low supply of material and goods due to Covid-19 shutdowns and the belief that demand would be weak following the shutdowns, we see prices from homes to cars to toys to obviously wood and other commodities sky-rocket.

So, it's easy to see that inflation is finally here, after years of the Fed trying to get it to move higher. But, now that it is here and it's clear the Fed had very little to do with it moving higher does anyone really have control of it? If no one does, then it could go much higher than most economists would like it to go, and it could stay that way for longer than most people would want it to?

So, how can you position yourself and your portfolio to benefit, but at the very least, not be hurt by high inflation? Let's take a look at a few ETFs that could help you.

The first are the U.S. Treasury Inflation-Protected Securities or typically known as TIPS Bonds. These TIPS bonds are products that the U.S. Treasury Department sells. They are just like your standard U.S. Treasury Bonds, except they have the inflation-adjusted feature. These products are tied to inflation, and the principal value of the bond rises as inflation rises while the interest payment varies with the adjusted principal value of the bond. In simple terms, if inflation increases, the adjusted principal will rise, and the bond owners' "real" buying power will not decrease if inflation rises. The downsides of these TIPS products are low return rates, especially if inflation doesn't creep higher.

A few of the Exchange Traded Funds that you could look into if you are interested in this type of investment are the Schwab U.S. TIPS ETF (SCHP), the iShares TIPS Bond ETF (TIP), or the SPDR Portfolio TIPS ETF (SPIP), just to name a few as there are many more options. They have all performed roughly the same over both short and longer time frames. However, SCHP has the lowest expense ratio I have been able to find at just 0.05%, compared to 0.12% and 0.19% for SPIP and TIP, respectively.

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Another option would be to invest in real estate ETFs. During high inflationary periods, real estate, along with other hard assets, i.e., commodities (which we will touch on shortly), typically not only hold their value well but increase alongside inflation. Furthermore, during times of high inflation, we would expect to see rising rental rates. Short-term rent and long-term leases will typically increase with inflation due to the basics of supply and demand. So REITs are good options. One big downside of REITs currently are more on the commercial real-estate side, since the pandemic has caused more people and companies to work from home, concerns that commercial office space will be in an over-supply situation moving forward. Demand for residential real estate is expected to be strong in certain parts of the country for the foreseeable future. It could get hit in areas where population growth is not occurring.

A few REIT ETFs worth looking into are the iShares U.S. Real Estate ETF (IYR), a catch-all REIT ETF. The iShares Residential and Multisector Real Estate ETF (REZ) which focuses about half its portfolio on U.S. residential REITS and the other half on specialized REITs. Other options that are a little more focused are the Pacer Benchmark Industrial Real Estate SCTR ETF (INDS), which invests in commercial, industrial types of real estate, think warehouses, and fulfillment centers. Lastly, we have the Global X Data Center REITs and Digital Infrastructure ETF (VPN), which invests in, you guessed it, data center warehouses and other digital infrastructure real estate, such as cell towers and other forms of real estate that are required for our internet-connected world.

Finally, we have the true commodity investments. During inflationary periods, commodity prices increase, largely inflation increase because commodity prices are increasing. So, investing in commodities prior to spiking inflation or during can be very profitable. (Unfortunately, most commodities have already seen a dramatic spike in prices, but that's not to say they can't go even higher.)

With commodity ETFs there are a few different types. First, you have the ETFs that hold the actual commodity itself, such as gold or oil. The SPDR Gold Trust (GLD) holds actual gold bars. The United States 12 Month Oil Fund (USL) holds oil futures, not actual barrels of oil. Or you could buy the SPDR S&P Global Natural Resources ETF (GNR), which holds stock in large commodity-producing companies.

So, before you start investing in commodity ETFs, you need to figure out which type of ETF you want to own, as they all have their pros and cons.

Investing during high inflationary periods can be tough, and what worked in the past may not always work in the future. But the key thing to remember is that any investment during high inflation periods needs to, at a minimum, keep up with inflation, or you are decreasing your long-term "buying power."

Matt Thalman Contributor - ETFs
Follow me on Twitter @mthalman5513

Disclosure: This contributor did not hold a position in any investment at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from for their opinion.