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5 types of ETFs to help you survive inflation

Posted: 17 June 2022 5:32 am

If you flee shares in the face of inflation and a possible recession, you risk missing out on the comeback. But you don't have to just take it. Consider ETFs like these designed for times like this.

It's no secret inflation is back.

The US Federal Reserve on Wednesday hiked its benchmark interest rate by 75 basis points, the biggest increase since 1994. The drastic measure to curb soaring inflation means one thing: the Fed sees inflation lingering for some time.

While in Australia, the Reserve Bank of Australia raised our rates by 0.5% in June and is largely expected to lift them again in July.

Rising inflation, along with a number of other untimely events, has pulled the market way down in 2022. While you may think avoiding the market entirely is the safest option, you don’t want to be on the sidelines when the market turns. Missing out of the market’s best days is costly to your long-term rewards.

Instead, consider shifting some of your money into the following inflation-fighting categories via exchange-traded funds (ETFs), so you can avoid picking and choosing individual winners and losers in this market.

In fact, you could be 47% better off than going to a managed fund.

1. Government inflation ETFs

In Australia you can buy ETFs that are linked with inflation. Indexes such as these comprise of inflation-linked fixed income securities.

The principal of these bonds is linked to the Consumer Price Index — increasing when inflation rises and decreasing when inflation drops. This protects investors from a decline in the purchasing power of their money.

These ETFs are issued in terms of five, 10 and 30 years and pay interest at a fixed rate every six months. At maturity, you are paid the adjusted principal or the original principal, whichever is greater. TIPS ETFs hold a collection of these assets. One example:

iShares Government Inflation ETF

  • Investment objective: The fund aims to provide investors with the performance of the Bloomberg AusBond Inflation Government 0+ Yr Index before fees
  • Net assets: $442 million
  • YTD returns: -15.03%
  • Management Fee: 0.18%
  • Latest dividend: 87.087 cents per unit owned

2. Gold

Gold has long been hailed as a hedge against inflation, increasing in value as the purchasing power of the dollar declines. It isn’t fool-proof, though — some studies show gold as being an efficient hedge against inflation, while others show that its hedging ability isn’t always consistent.

Still, gold prices have been higher since the Fed announced more aggressive rate hikes on Wednesday, suggesting investors see it more as a safe haven than not as inflation abounds. So while gold may not be the best inflation protector, you should consider giving it a spot in your portfolio. Here’s one of the largest gold ETFs.

ETFs Physical gold

  • Investment objective: The fund aims to own physical gold on your behalf.
  • Net assets: $2 billion
  • Last 6 months: 4.85%
  • Management costs: 0.40%
  • Latest dividend: NA

3. Oil

Oil prices usually increase along with inflation, and vice versa, so investing in companies that profit from rising prices can be a good hedge in periods of rising costs. Couple that with a global oil supply that’s currently well below normal levels, as the US and EU move to ban most Russian oil imports following its invasion of Ukraine, and investors have a recipe for possibly significant gains.

The energy sector, largely made up of oil companies, is up nearly 42% year to date. Experts think oil prices will go higher from here, which could continue to be a boon for investors. Here’s one ETF tracking the price of oil:

BetaShares Crude Oil Index ETF - Currency Hedged (synthetic)

  • Investment objective: OOO aims to track the performance of an index (before fees and expenses) that provides exposure to crude oil futures, hedged for currency movements in the AUD/USD exchange rate.
  • Net Assets: $236 million
  • YTD returns: 41.67%
  • Management costs: 0.69%
  • Latest dividend: NA

4. Commodities

Aside from gold and oil, commodity prices in general rise when inflation is accelerating, which means investing in this market could provide investors with a hedge against inflation. In fact, research by Vanguard shows that the consistent positive beta between commodities and inflation over the last decade suggests that a 1% rise in unexpected inflation would produce a 7% to 9% rise in commodities.

Commodity prices have been surging since 2020, but Russia’s invasion of Ukraine triggered widespread disruptions in global commodity markets, particularly in those where Russia and Ukraine are key exporters. Current conditions suggest investing in commodity ETFs like this one could help protect you as inflation surges.

Betashares Agriculture ETF-Currency Hedged

  • Investment objective: FOOD aims to track the performance of an index (before fees and expenses) that comprises the largest global agriculture companies (ex-Australia), hedged into Australian dollars.
  • Total assets: $142,497,490
  • YTD returns: -.01%

5. Real estate

Real estate is considered another approach to hedge against inflation, as it generally doesn’t move in sync with stocks and bonds. Property values also tend to increase as inflation edges higher and landlords can generally raise rents to adjust for rising costs.

Investors can avoid the headaches of owning physical properties during these times and achieve the same inflation-hedging advantages by investing in real estate ETFs with portfolios of real estate investment trusts (REITs) and other income-producing real estate. When rents increase when prices do, investors should benefit from a reliable stream of rising dividend income. Here's one but you'll need a US broker:

Vanguard Real Estate ETF (VNQ)

  • Investment objective: Seeks to track the performance of the MSCI US Investable Market Real Estate 25/50 Index.
  • Total assets: $78.4 billion
  • YTD returns: -22.34%
  • Expense ratio: 0.12%
  • Latest dividend: $0.57670
  • Dividend yield: 2.6%

Bottom line

Tweaking your investments is part of the process of maximising your portfolio’s returns and the same is true during periods of rising inflation. TIPS, gold, oil, commodities and real estate tend to perform better during inflationary environments, so consider making these ETFs or others in their categories a part of your portfolio as you navigate this period of rising inflation.

For more ETF investing ideas, see our page on top-performing ETFs right now.

Ready to open an account or considering a new broker? Find the best online brokers for your needs. Or check out fees and features in our comparison table to find a better deal today.

At the time of publication, Matt Miczulski did not own shares of any equity mentioned in this story.

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