11 ETFs That Will Save You From Inflation

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By Rich Meiers
This article originally appeared on
Traders Reserve.

What do your gasoline tank and a shopping cart have in common? They both cost more to fill up these days. But you have probably known this for some time and it’s not news to you.

But the so called enlightened “chattering classes” that live in the high-rent districts seem to be finally catching on. All of a sudden, inflation is hot. It’s in the headlines everywhere, and the finger-pointing blame game has begun.

World governments, politicians and partisans can argue all they want over the causes. Whether it’s an expanding world economy or money supply doesn’t matter, inflation is here and could rob investors blind if they are not prepared.

Armed with the results of an International Monetary Fund (IMF) study on inflation’s impact on investment results, let me give you the self-defense techniques needed to protect your assets with exchange-traded funds (ETFs).

But first, let’s review the findings of the IMF report. Minus an inflation shock, cash is not king, stocks get wounded, but owning bonds kills; at least in the beginning anyway. On the flipside, commodities tend to keep pace with inflation.

Not all commodities are equal, though; gold outperforms inflation and actually increases your purchasing power upfront. We expect silver to provide a similar benefit as its performance closely tracks gold’s; however, silver was not mentioned in the IMF white paper. Oil and food are subject to the balancing act between inflation slowing economic growth and rising prices.

Real estate is a mixed bag. Commercial and residential properties tend to fair well, but not in the form of a Real Estate Investment Trust (REIT). Unfortunately, REITs are the most common way to access real estate through the stock market. The moral of the story is to buy the property if you have the money and collect the income.

These performance traits last about 12-18 months, and then they trade places.

Now we have a working model and time frames necessary to build a portfolio of ETFs that can effectively battle the corrosive effect of inflation.

Buy gold and silver ETFs like:

  • iShares Gold Trust (NYSE: IAU)
  • iShares Silver Trust (NYSE: SLV)

There are plenty of inverse ETFs that go up when the market goes down, but we suggest just sticking to the indexes:

  • Dow Jones: ProShares Short Dow30 (NYSE: DOG)
  • S&P 500: ProShares Short S&P500 (NYSE: SH)
  • Nasdaq: ProShares Short QQQ (NYSE: PSQ)

Bonds start off as the worst offenders. We might be seeing the beginning of this phase as interest rates are on the rise. Maturities of more than 10 years have done worse than their shorter-term brethren. We will take the same course of action as stocks, and suggest focusing on bond ETFs that rise when bonds fall. For example:

  • ProShares Short 20+ Year Treasury (NYSE: TBF)

As we mentioned above, this approach should carry you through the first year or two if history holds. Somewhere around the 12-month mark, investors should start to slowly unload pieces of the inflation holdings and reallocate them in more traditional ETFs as stocks and bonds begin to recover. Perhaps, over the course of six months to a year, the freed up money can be placed in ETFs such as:

  • Dow Jones: SPDR Dow Jones Industrial Average (NYSE: DIA)
  • S&P 500: SPDR S&P 500 (NYSE: SPY)
  • Nasdaq: PowerShares QQQ (NASDAQ: QQQ)

As for bonds:

  • Government: iShares Barclays 20+ Year Treasury Bond (NYSE: TLT)
  • Corporate: iShares iBoxx $ Invest Grade Corp Bond (NYSE: LQD)

In the event of an inflation shock, the length of the cycle gets stretched out. Instead of the first phase lasting 12-18 months, it has averaged three years in the past. However, the recovery phase for stocks and bonds disconnect.

Bonds get back on their feet as the initial phase comes to a close, but stocks can take five years or more to recover. The report defines an inflation shock as a one standard deviation beyond the norm. For those of you who remember, think of the 1970s. For the rest, it’s difficult to define, but you’ll know it when you see it.

The strategy for a stock is almost the same. Invest in ETFs that have traditionally benefited from rising inflation. On or about the three-year anniversary, start reallocating funds into bonds ETFs. A couple of years later, stocks become more attractive and money should flow back in.

More aggressive investors could use leveraged ETFs that produce two, three to four times the performance of the underlying indexes. Of course, ours is an incomplete list of ETFs. There are ETFs that are built to perform well in high inflation environments; however, many are new and untested. So, we decided to stick to the basics.

For those who see inflation as a risk, it might be wise to have a separate portfolio of funds utilizing some of the ETFs. Think of it as an insurance policy, just in case the inflation house catches fire.

For more trades, ideas and strategies, visit Traders Reserve.


Article printed from InvestorPlace Media, https://investorplace.com/2011/04/etf-funds-to-buy-iau-slv-dog-sh-psq-tbf-dia-spy-qqq-tlt-lqd/.

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