ETF Strategies To Navigate 40-Year High U.S. Inflation Levels

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The world’s largest economy is grappling with consistently high-inflation levels. Per the latest Labor Department report, the Consumer Price Index (CPI) jumped 8.6% year over year in May (the maximum since 1981), surpassing the already high Dow Jones estimate of an 8.3% rise. The metric compared unfavorably with the 8.3% rise in April.

Energy, food, and shelter stood out as major contributors to the surge in the index. Notably, energy prices rose 34.6% year over year, while gas prices jumped about 49%, according to a Yahoo Finance article.

The core inflation index, which excludes volatile components, such as food and energy prices, rose 6% year over year, beating expectations of a 5.9% rise. The rising inflation levels once again dashed the hopes of inflation peaking in May.

The continued steep inflation levels are also weighing on consumers’ sentiment in the United States. The growing supply-chain disturbances emanating from the ongoing Russia-Ukraine war crisis and the resurging COVID-19 cases in China might trigger concerns over further rising inflation levels.

The University of Michigan's popular Surveys of Consumers consumer sentiment index declined to 50.2 in the preliminary June survey, hitting the lowest mark recorded by the survey since the mid-70s (per a Yahoo Finance article).

Notably, the hot inflation data compelled investors to look for alternative investment options that may fare better than cash or bonds in an inflationary environment. Moreover, certain companies with compromised pricing power may take a severe hit amid inflation, while future earnings may also look less attractive amid high inflation levels. Against this backdrop, let’s consider the following ETF trades:

Gold ETFs to Hedge Inflation

Given the current scenario, gold prices have been rising for a while. The inflationary backdrop in the United States is favorable for gold as the metal is viewed as a hedge against inflation.

Gold ETFs mostly move in tandem with gold prices. The SPDR Gold Shares (GLD - Free Report) and iShares Gold Trust (IAU - Free Report) are some popular ETFs. GLD and IAU carry a Zacks ETF Rank #3 (Hold) with a Medium-risk outlook.

TIPS ETFs Come to the Rescue

TIPS ETFs offer robust real returns during inflationary periods unlike their unprotected peers in the fixed-income world. The same provides shelter from increasing prices and protects income for the long term. While there are several options in the space to tap the rising consumer prices, we highlighted iShares TIPS Bond ETF (TIP - Free Report) and Schwab U.S. TIPS ETF (SCHP - Free Report), which can be compelling investment choices. TIP and SCHP have a High-risk outlook.

Check Inflation Beneficiary ETFs

Investors can keep track of ETFs that seek to hedge against or benefit from inflation. In this regard, the actively-managed Horizon Kinetics Inflation Beneficiaries ETF (INFL - Free Report) is an option that invests in companies expected to benefit from inflation. The Fidelity Stocks for Inflation ETF (FCPI - Free Report) can also be considered as it holds companies with attractive valuations, high-quality profiles, and positive momentum in industries that generally outperform in inflationary environments. The VanEck Inflation Allocation ETF (RAAX) is an actively-managed fund that provides exposure to inflation-fighting assets and can be kept on the radar. RAAX holds ETFs that invest in real assets, including commodities, natural resource equities, REITs, MLPs, gold, and bitcoin.

Track REITs ETFs

Investors might frown at the prospect of investing in REITs amid the rising rate environment. However, these investment vehicles can provide equity exposure while consistently paying out dividends and providing good diversification benefits.

Moreover, REITs provide good exposure to growth-oriented areas like data centers and cellphone towers that are well-positioned to gain from an improving economy. Also, REITs are popular for hedging naturally against inflation. Notably, rising property prices and increasing rental income in an inflationary environment make REITs a good investment option.

Investors can therefore keep a track of ETFs like Vanguard Real Estate ETF (VNQ - Free Report), Schwab U.S. REIT ETF (SCHH - Free Report), Real Estate Select Sector SPDR Fund (XLRE), and iShares U.S. Real Estate ETF (IYR).

Opt for Commodity ETFs

As an asset class, commodities are observed to have a positive correlation with inflation. Moreover, by providing good diversification benefits, they are also found to be uncorrelated with the broader stock market.

It is important to note that commodity ETFs mostly hold futures that could involve roll costs or yields. Therefore, these ETFs are more suitable for short-term trading or hedging activities.

Following are some commodity ETFs that investors can keep close tabs on as the geopolitical crisis worsens: Invesco DB Commodity Index Tracking Fund (DBC - Free Report), WisdomTree Enhanced Commodity Strategy Fund (GCC - Free Report), Teucrium Corn Fund (CORN) and Invesco DB Base Metals Fund (DBB).

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