Exchange traded funds can play an important role in protecting a portfolio against inflation according to John Spence’s article Whip Inflation with ETFs.
Spence writes that using specialized exchange-traded funds to guard portfolios against inflation is becoming popular in light of massive government spending to combat the economic recession and the prospect of a weaker U.S dollar. The specific concern is that the Federal Reserve will be slow to raise rates once the U.S. economy turns the corner.
How can ETF investors protect their portfolios against rising prices?
TIPS
Spence suggests considering Treasury Inflation Protected Securities, or TIPS, as a straightforward way to purchase inflation insurance. TIPS ETFs include the iShares Barclays TIPS Bond Fund (TIP) and SPDR Barclays Capital TIPS (IPE). The SPDR DB International Government Inflation-Protected Bond ETF (WIP) follows inflation-indexed bonds in foreign markets.
Gold and Commodities
For investors seeking to use gold and other commodities as an inflation hedge, Spence mentions several ETFs including:
Metals
SPDR Gold Trust (GLD), iShares Silver Trust (SLV), PowerShares DB Gold Fund (DGL) and PowerShares DB Precious Metals Fund (DBP) and PowerShares DB Base Metals Fund (DBB)
Food
PowerShares DB Agriculture Fund (DBA)
Oil and energy
United States Oil Fund (USO), Energy Select Sector SPDR Fund (XLE)
Commodity baskets
PowerShares DB Commodity Index Tracking Fund (DBC), iShares S&P GSCI Commodity Indexed Trust (GSG)
Other Options
Spence also points out that some investors bet against the U.S. dollar (CurrencyShares Euro Trust (FXE) or PowerShares DB Dollar Index Bearish Fund (UDN)) or long term treasuries (ProShares UltraShort 20+ Year Treasury (TBT)) as ways to hedge against inflation.
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