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Follow Buffett With These Inflation-Friendly ETF Strategies

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Inflation has been on an uphill ride this year thanks to the low-base effects from 2020. Also, because economic recovery has picked up on widespread vaccination and fiscal stimulus, business restrictions have been relaxed and demand has jumped.

U.S. consumer price increases in July remained at a 13-year high on an annual basis. The consumer price index increased 0.5% last month after climbing 0.9% in June. In the 12 months through July, the CPI advanced 5.4%.

Against this backdrop, Warren Buffett has suggested a few investing techniques that can be practiced at the time of rising inflation. Below we highlight those investing ideas.

Information Technology

“The best businesses during inflation are the businesses that you buy once and then you don’t have to keep making capital investments subsequently,” Buffett said, as quoted on CNBC (read: 3 Solid Reasons to Bet on Big Tech ETFs and Stocks).

Information Technology business normally does not require recurrent capital investments, which makes it an inflation-friendly investment. CNBC’s Jim Cramer said that big tech stocks are lucrative bets amid rising inflation and chances of higher interest rates.

Cramer explained that big-tech names like Google-parent Alphabet (GOOGL - Free Report) and Microsoft’s (MSFT - Free Report) business model are not that responsive to changes in inflation, including the rise in prices for raw materials, chemicals and commodities like gas, plastics, packaging and so on. Higher transportation charges are also less likely to bother the operation of big tech companies. Technology Select Sector SPDR ETF (XLK - Free Report) and Global X Social Media ETF (SOCL - Free Report) look to be great bets here.

Real Estate

Buffett suggests owning real estate during times of inflation because the purchase is a “one-time outlay” for the investor, does not incur recurring costs and involves resale value. In a rising-inflation environment, real estate stocks act as good bets. Both, resale value of the property and rental income, rise with price inflation (read: Why Real Estate ETFs Could be Tapped Now).

Plus, a uptick in home prices is a boon for renters. Along with some analysts, we too believe that fast-rising home prices are likely to keep prospective homebuyers away from the ownership and direct them toward the rental market.

Some of the decent real estate ETF plays right now are Real Estate Select Sector SPDR ETF (XLRE - Free Report) (yields 2.87% annually), PPTY U.S. Diversified Real Estate ETF (PPTY) (yields 2.90% annually) and VanEck Vectors Mortgage REIT Income ETF (MORT) (yields 7.01% annually).

S&P 500

“Consistently buy an S&P 500 low-cost index fund,” Buffett said in 2017, as quoted on CNBC. “Keep buying it through thick and thin, and especially through thin.” Low-cost index ETF investing looks good for retirement savings.

The index is up 18.3% this year and added 30.8% past year. In the last 10 years, the SPDR S&P 500 (SPY) ETF gained a 15.23% compound annual return, with a 13.45% standard deviation. It currently yields 1.26%, matching the benchmark U.S. treasury yield (as of Aug 20, 2021).

Discard Utilities?

Businesses like utilities or railroads “keep eating up more and more money” and aren’t as profitable, Buffett shared. Hence, investors need to be cautious before investing in funds like Utilities Select Sector SPDR ETF (XLU - Free Report) .