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ETF Strategies to Win From Likely Rise in Inflation

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Talks of rising inflation in the United States have been rife since the passage of the $1.9-trillion stimulus bill that included the $1,400-stimulus check under the Biden administration. Widespread vaccination and a prolonged period of a dovish Fed have also fueled the speculation.

Data points too are suggesting the same. The annual inflation rate in the United States jumped to 2.6% in March 2021 from 1.7% in February, slightly higher than market forecasts of 2.5%. It marked the highest reading since August 2018.The Institute for Supply Management’s monthly manufacturing survey also indicated a rise in raw material costs.

Analysts pointed out some historical evidences of higher inflation in the aftermath of fiscal and monetary stimulus. Following Roosevelt’s election as president in 1932, his New Deal policies had boosted increased government spending to rescue the economy from the trap of depression.

The deflationary trend from 1930 to 1933 was snapped then thanks to that stimulus and more normal inflation rates had followed from 1934 to 1937. A similar trend was seen during the World War II, per a Morningstar article.

The current government stimulus package has already ballooned to more than $5 trillion, and Congress will likely boost that in the coming months. This is happening along with a rock-bottom rate and a QE policy. So, a gradual but steady rise in inflation is expected over the medium term.

If the COVID-19 situation improves soon, the upbeat demand outlook will boost long-ailing energy prices providing another round of boost to inflation. Hence, investors can track the below-mentioned ETF strategies to fight inflation.

Precious Metals – Inflation Protected Assets

The inflationary backdrop in the United States is favorable for gold as the metal is historically viewed as a hedge against inflation. Rising inflation often lowers the value of the concerned currency, meaning a subdued greenback. If the greenback remains subdued, gold will gain some glitter back (read: 3 Reasons Why Gold ETFs Could Gain Higher).

The theory holds good for silver, platinum and palladium also. While white metals often act as precious metals, these also have extensive industrial usages. The role in the industrial sector makes the case for white metal investing stronger as economic reopening would boost the industrial metal prices.

SPDR Gold Shares GLD, iShares Silver Trust (SLV), Aberdeen Standard Platinum Shares ETF (PPLT) and Aberdeen Standard Physical Palladium Shares ETF (PALL) are the ETFs to track such metals.

Time for Floating Rate & TIPS Bonds?

When inflation rises steadily, rates normally rise. Such a situation should be helpful for floating rate bond ETFs like iShares Floating Rate Bond ETF FLOT. Floating rate notes are investment grade bonds that do not pay a fixed rate to investors but have variable coupon rates that are often tied to an underlying index (such as LIBOR) plus a variable spread depending on the credit risk of issuers. Since the coupons of these bonds are adjusted periodically, they are less sensitive to an increase in rates compared to the traditional bonds (see all Investment Grade Corporate Bond ETFs here).

Meanwhile, TIPS ETFs like iShares TIPS Bond ETF TIP is another bet. These offer exposure to U.S. TIPS, which are government bonds whose face value rises with inflation. TIPS ETFs offer robust real returns during inflationary periods unlike its unprotected peers in the fixed-income world.

These securities pay an interest on an inflated-principal amount (principal rises with inflation) and when the securities mature, investors get either the inflation-adjusted principal or the original principal, whichever is greater. As a result, both principal amount and interest payments will keep on increasing with rising consumer prices.

Bet on Value ETFs

Investopedia explains that rising inflation pushes input prices higher; consumers are likely to buy lesser number of goods; companies’ revenues and profits decline, and the economy slows for some time. Still, rising rates are good for value stocks than the growth ones as the latter’s cash flows come way out in the future, as indicated by New York University finance professor Aswath Damodaran, as quoted on CNBC. Vanguard Value ETF VTV is thus a good bet.

Play Inflation-Protected ETFs

Thanks to the growing reach of the ETF industry, we now have several ETFs that offer exposure to tackle the inflationary pressure. These ETFs are ProShares Inflation Expectations ETF RINF, Horizon Kinetics Inflation Beneficiaries ETF (INFL) and Quadratic Interest Rate Volatility and Inflation ETF (IVOL).

Real Estate Prices Are Soaring

With higher demand and an uptrend in inflation, home prices have been uphill. In the fourth quarter of 2011, the median sale price was about $221,000 while at the end of first quarter of 2021, it had jumped to $347,500. Thanks to rising home prices, affordability is falling. Demand for renting has been increasing, which in turn is giving a push to shelter costs. This means exposure to real estate could be inflation-beating. iShares U.S. Home Construction ETF (ITB) and Real Estate Select Sector SPDR ETF XLRE are two ETF plays out here.

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SPDR-GOLD TRUST (GLD): ETF Research Reports
 
ISHARS-TIPS BD (TIP): ETF Research Reports
 
VIPERS-VALUE (VTV): ETF Research Reports
 
PRO-SH INFL EXP (RINF): ETF Research Reports
 
ISHARS-FL RT BD (FLOT): ETF Research Reports
 
SPDR-RE SELS (XLRE): ETF Research Reports
 
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