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ETF Strategies to Tackle the Rising Inflation Levels

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Inflation levels continue to rise in the United States. According to the Commerce Department, another major inflation indicator, core personal consumption expenditures (PCE) price index, used by the Federal Reserve to set policy, climbed 3.4% year over year in May, per a CNBC article. Notably, it registered the biggest gains since April 1992 and was on par with Wall Street estimates. Going on, the PCE index was up 3.9% for the year and 0.4% for the month after including volatile food and energy prices, according to a CNBC article.

There are many factors that have led to the rise in inflation levels. Rising raw material prices due to supply-chain disruptions made it difficult for manufacturers to meet the increasing demand as the global economies reopened, per a CNBC article. Moreover, rising real estate prices have been a reason for the increasing inflation levels.

Furthermore, the annual inflation rate has accelerated to a higher-than-expected 5.0% in May. Excluding volatile food and energy prices, the "core" consumer price index (CPI) rose 3.8% year over year, without seasonal adjustment. It marked the largest one-year increase since the period ending June 1992.

Notably, investors kept the Wall Street rally tight in the recent past, largely due to their growing concerns over the rising inflation levels. They were worried that increasing inflation may hurt corporate margins and profits. They also feared that this persistent escalation in inflation may put pressure on the Federal Reserve to tighten monetary policy, according to a CNBC article.

Going by a CNBC article, Fed Chairman Jerome Powell has however remained bullish on the economic recovery achieved so far from the pandemic-led slump. He also maintained that high inflation levels were temporary and will return to 2% over the long term, per the same article.

The central bank now expects inflation to jump to 3.4% this year, higher than its previous forecast of 2.4%. PCE inflation expectation has gone up to 2.1% for 2022 from 2% projected in March and to 2.2% for 2023 (from 2.1%). This has flared up talks of a faster-than-expected rate hike. However, the Fed has signaled two rate hikes by the end of 2023 amid higher inflation.

Considering the current scenario, let’s take a look at some ETF areas that can offer good plays to combat rising inflation levels:

Gold ETFs to Hedge Inflation

The inflationary backdrop in the United States is favorable for gold as the metal is viewed as a hedge against inflation. Moreover, rising inflation often lowers the value of the concerned currency. If the greenback remains subdued, gold will gain some glitter back. Also, analysts at the Morgan Stanley expect the yellow metal to maintain prices above $1,700 an ounce through the second half of the year, as mentioned in a Bloomberg article.

Gold ETFs mostly move in tandem with gold prices. The SPDR Gold Shares (GLD - Free Report) , iShares Gold Trust (IAU - Free Report) , SPDR Gold MiniShares Trust (GLDM - Free Report) and GraniteShares Gold Trust (BAR - Free Report) are some of the popular ETFs. Below we have discussed some of these in detail:


This is the largest and most popular ETF in the gold space, with AUM of $59.83 billion and average three-month trading volume of about 8.7 million shares. The fund reflects the performance of the price of gold bullion, less the Trust's expenses. At launch, each share of this ETF represented about 1/10th of an ounce of gold. The expense ratio is 0.40% (read: Core Inflation at 29-Year High: 6 ETF Areas to Benefit).


This ETF offers exposure to the day-to-day movement of the price of gold bullion. It has AUM of $28.96 billion and trades in a solid three-month volume of 11.1 million shares, on average. At launch, each share of this ETF represented about 1/100th of an ounce of gold. The ETF charges 25 basis points (bps) in annual fees (read: Gold ETFs to Shine Bright on Rising Prices Amid Inflation Woes).

TIPS ETFs at Rescue

TIPS ETFs offer robust real returns during inflationary periods unlike its unprotected peers in the fixed-income world. It not only provides shelter from increasing prices but also protects income for the long term. While there are several options in the space to tap rising consumer prices, we have highlighted the four popular ETFs that could be compelling investments -- iShares TIPS Bond ETF (TIP - Free Report) , Schwab U.S. TIPS ETF (SCHP - Free Report) , Vanguard Short-Term Inflation-Protected Securities ETF (VTIP - Free Report) and iShares 0-5 Year TIPS Bond ETF (STIP - Free Report) .


This ETF is the most-popular choice in the TIPS space, with AUM of $28.23 billion and an average three-month trading volume of 2.9 million shares. It tracks the Bloomberg Barclays U.S. Treasury Inflation Protected Securities (TIPS) Index (Series-L). It charges 19 bps in fees per year (read: Inflation Zooms to 13-Year High: 5 Solid TIPS ETF Picks).


This fund tracks the Bloomberg Barclays US Treasury Inflation-Linked Bond Index (Series-L). SCHP is among the cheapest options in the TIPS space, charging just 5 bps in annual fees. It has AUM to $18.37 billion and trades in a solid three-month average volume of about 2.3 million shares.

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