Win the battle against inflation with ETFs

Inflation is one of those economic dangers that everyone knows about, but few know how to fight when it decides to reap its ugly head. The basic definition of inflation is an increase in costs in products and services linked to our daily way of life. Now, inflation is not so bad if income increases along with rising costs, but since this rarely happens, inflation often indicates a decline in the purchasing power of consumers. There is an example that most of us who depend on automobiles are familiar with: the cost of gasoline.

When we head to the local gas station to put gasoline in our cars, that gas has been refined from crude oil, perhaps the most traded and most volatile commodity in the world. Historically, gas prices move in unison with oil prices. If you paid $ 2.50 a gallon last week, but crude rose a few dollars a barrel in the meantime, you may be paying $ 2.75 a gallon this week. That’s a 10% increase and you probably didn’t get a 10% raise to absorb that price increase, hence the problem with inflation.

Fortunately, there are ways for investors to not only protect their portfolios from inflation, but also profit when inflation kicks in. Let’s take a look at some of the options.

ETF: the battlefield of inflation protection

There are many clear advantages to investing in commodity exchange-traded funds (ETFs), particularly as a way to add this asset class to your portfolio without the risk of buying future contracts outright. Well, commodity-based ETFs are also a great way to profit from inflation. We already highlighted how rising oil prices are a sign of inflation and there is an ETF that can help you take advantage of higher oil prices. The US Oil Fund (USO), which invests in derivatives contracts and crude futures, trades like a stock and is an ideal way for investors to benefit from a surge in crude prices without having to buy shares in a company oil company. Oil stocks often lag behind fluctuations in crude prices, and that can make them frustrating investments.

Of course, we cannot forget about gold. The yellow metal has been the inflation fighter of choice for tons of investment experts for decades. The idea is that when inflation rises, stocks and other assets falter, and this increases the demand for gold. There is also an ETF to help you make a profit. The SPDR Gold Shares (GLD) ETF actually holds physical gold bullion and is one of the largest gold owners in the world. Investing in gold can be expensive, not to mention risky, if you’re playing the futures market, which is why GLD is an avenue investors should consider when seeking inflation protection. Remember that gold is all about supply and demand, so if inflation is rising and there are questions about the global supply of gold, gold prices will almost certainly skyrocket.

Bond ETF: a worthwhile alternative

Many investors think that investing in bonds is boring. Bonds rarely possess the volatility of stocks or commodities, but they should be part of any portfolio looking to be well balanced. Of course, bonds are great ways to generate low-risk income, which is why many financial advisers recommend higher bond holdings for retirees and older investors.

In the form of Treasury Inflation Protected Securities (TIPS), the world of bonds offers investors a robust, low-risk way to protect their portfolios from the spectrum of inflation. There are a couple of matching ETFs to give investors exposure to TIPS. The iShares Barclays TIPS Bond ETF and the SPDR Barclays Capital ETF are just two of the TIPS bond ETFs investors may want to consider.

The interest paid to the TIPS investor rises and falls along with inflation, so keep that in mind before investing in these securities. In other words, if inflation is decreasing and you have TIPS, you will receive lower interest payments. Remember that if you hold a TIPS ETF to maturity, the return you will receive will be adjusted for inflation and this can have an adverse impact on your overall returns.

Don’t fall victim to inflation

In the past, retail investors did not have many options to combat inflation. Inflation was something of a smile-and-duck scenario, but as ETFs have proliferated, so have low-risk alternatives for investors looking for ways to beat inflation. There are a variety of other ETFs that we have not discussed that can also be used as inflation fighters and to help properly diversify your portfolio. If bonds aren’t your thing, take a look at some of the other metal ETFs, and don’t forget about agricultural ETFs that focus on soft commodities like corn, soybeans, and grains.

Inflation sucks. That’s an indisputable fact, but tools are available to help investors not only find some protection against the inflationary storm, but also profit from it.