If last month’s numbers are any indication, inflation is certainly picking up…
As you probably know, the Producer Price Index (PPI) just posted its largest increase in 10 years. And the Consumer Price Index (CPI) saw its largest increase since 2018.
My colleague, Genia Turanova, previously covered the best assets to own in inflationary times…
She recommended dividend stocks and precious metals, which are both great options. But I approach inflation a little differently…
I prefer to look for diversified equity and fixed income funds that are specifically designed to benefit during inflationary periods.
Today, I’ll tell you my three favorite funds for fighting inflation.
Why ETFs?
Exchange-traded funds (ETFs) offer many benefits. First, they provide diversification, which means you’re spreading your risk by owning a basket of stocks. So, if one stock runs into trouble, it won’t have a major effect on the rest of the fund. In fact, any losses from one stock could be offset by gains from the others.
ETFs are also a great “hands-off” investment. They give you access to a big portion of the market without needing to research tons of individual stocks.
I picked two stock funds and one bond fund with holdings that have historically benefited from inflation.
Horizon Kinetics Inflation Beneficiaries ETF (INFL)
The Horizon Kinetics Inflation Beneficiaries ETF is an actively managed fund. Instead of tracking an index, the fund’s managers make decisions about which stocks go in the fund.
INFL is designed to generate long-term growth in inflation-adjusted terms. Management invests in domestic and foreign stocks of companies that will benefit from a rise in the prices of “real assets.”
Real assets are physical properties like commodities and land. For example, the fund invests in exploration and production companies, mining companies, and infrastructure companies.
These companies’ business models are less reliant on capital and labor. This allows them to profit in both inflationary and low-inflation periods. These companies benefit from rising prices while avoiding increases in expenses.
The fund’s top holding is Texas Pacific Land Corporation (TPL), which is a landowner in Texas. The company generates revenue from pipeline, power line, and utility easements. Plus, it offers temporary permits related to land use.
Another top holding is Franco-Nevada Corporation (FNV), a gold-focused royalty and stream company. It also has additional interests in silver and platinum group metals.
While fairly new—the fund launched on January 11, 2021—it’s already drawn over half a billion in assets. However, it has delivered excellent performance already in its short existence, rising 17.7% (vs. a 10.2% gain for the S&P 500).
If you’re looking for exposure to real assets, this is the perfect fund… especially if inflation keeps surging.
Fidelity Stocks for Inflation ETF (FCPI)
My next pick is the Fidelity Stocks for Inflation ETF. Unlike INLF, this ETF is index-based. Instead of a manager or team making decisions, the fund tracks an index. An index fund typically has a lower expense ratio and more holdings, which makes it cheaper and more diversified.
FCPI tracks the Fidelity Stocks for Inflation Factor IndexSM, which includes large and mid-cap U.S. stocks. These stocks must have attractive valuations, high-quality profiles, and positive momentum signals. Since the fund targets a variety of industries, an index strategy with more holdings is a better choice.
The key to this ETF is that these stocks must have historically outperformed in inflationary environments. The fund’s top sectors include technology, healthcare, and consumer staples sectors.
Its current top holdings include familiar names such as Apple (AAPL), Microsoft (MSFT), and Procter & Gamble (PG). While the fund has been around since November 2019, it hasn’t generated much interest as there was less concern over inflation that year. I expect that to change as more inflation data comes out.
Year to date, the ETF is up 13.8%, compared to an 11.5% gain for the S&P 500. FCPI is also outperforming the index over the past month. As inflation rises, I believe this ETF will continue to outperform the market.
This fund is another big time-saver for investors. It would take many hours of research to find individual stocks that have historically outperformed during inflationary times.
Allocating some money to this diversified fund is a great way to add another layer of inflation protection to your portfolio.
iShares TIPS Bond ETF (TIP)
I just highlighted two equity ETFs, and now it’s time for a fixed-income fund. “Fixed income” is just a fancy word for bonds. Bond funds are a great way to lower the risk of your portfolio. While stocks offer higher return potential, they come with higher risk and volatility. Bonds generate lower returns over time, but they typically hold steady when the stock market sinks. They’re perfect for conservative investors.
Put simply, the iShares TIPS ETF is a bond fund that rises with inflation. It tracks the Bloomberg Barclays U.S. Treasury Inflation-Linked Bond Index. This index includes inflation-protected U.S. Treasury bonds with at least one year until maturity.
Treasury Inflation-Protected Securities, or TIPS, protect against inflation. The principal of these bonds gets adjusted higher for inflation (or lower if there’s deflation), as measured by the CPI. In other words, their value increases when the CPI rises, which results in higher coupon payments.
By buying TIP, you get access to the entire Treasury Inflation-Protected Securities yield curve in a single fund. The yield curve is a line that plots the bond interest rates over time. Bonds with short maturity dates usually offer a lower interest rate… but investors get higher rates by buying long-term bonds that are “further out” on the yield curve. This fund gives you exposure to TIPS with a range of different maturities.
TIP is a great option for conservative investors looking for protection against inflation.
Action steps
With inflation a rising concern, investors need to protect themselves.
In addition to dividend stocks and gold and silver, investors should consider equity and bonds ETFs that fight inflation. The two stock ETFs I mentioned above allow you to stay invested and potentially benefit from inflation. Plus, I’ve included a fixed income ETF to help lower your risk.
The Horizon Kinetics Inflation Beneficiaries ETF invests in stocks that benefit from rising prices of real assets. The Fidelity Stocks for Inflation ETF targets sectors that have historically performed well in inflationary periods. Plus, it has a momentum component to make sure these stocks are moving in the right direction.
And if you want to add some fixed-income exposure to lower your risk, the iShares TIPS Bond ETF is a perfect option, as its value rises along with the CPI.
By investing in these three ETFs, your portfolio will be in great shape to survive—and even profit from—a surge in inflation.
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