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ETF Strategies to Combat Red-Hot Inflation Readings

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Inflation levels continue to surge and remain a concern for the U.S. economy.Per the latest Labor Department report, the Consumer Price Index (CPI) jumped 7.5% year over year in January, marking the largest 12-month gain since February 1982. The high inflation level has set the tone for the first interest rate hike as soon as March.

The core inflation index, which excludes volatile components such as food and energy prices, rose 6% year over year, marking the highest growth since August 1982. Energy prices remained a key contributor to the inflation numbers, with a 27% year-over-year increase.

Going on, U.S. consumers have started feeling the pressure of the rising inflation levels. The latest disappointing preliminary consumer sentiment readings for early February that have slipped to the lowest level in more than a decade highlight the same. The University of Michigan’s preliminary consumer sentiment dropped to 61.7 in early February from a final reading of 67.2 last month. The metric, which witnessed the lowest level since October 2011, lagged the market forecast of a slight rise to 67.5, per the Reuters survey on economists.

The producer price index (PPI) readings that measure wholesale prices climbed 1% in the previous month and 9.7% for the 12-month period, per a CNBC article. Notably, the core PPI increased 0.9%.

Going on, considering the consistently hot inflation readings, the central bank has already started tapering bond purchases, which it expects to complete by March. The Fed is expected to begin raising its benchmark interest rate in March. The Federal Reserve may take a more aggressive approach in raising interest rates. In fact, Goldman Sachs is expecting the Federal Reserve to increase interest rates seven times this year, according to a CNBC article.

Notably, the hot inflation data has 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 and future earnings may also look less attractive amid high inflation levels. Against this backdrop, let’s take a look at some ETF trades that can be considered:

Gold ETFs to Hedge Inflation

Considering the current scenario, gold prices have been rising. The inflationary backdrop in the United States is favorable for gold as the metal is viewed as a hedge against inflation. Going by an article on, Commerzbank also predicts 2022 to be a favorable year for gold. The report further mentioned that “in the United States, inflation is currently at a 39-year high of 6.8%, in Germany at more than 5%, the highest level in 29 years, and in the Eurozone at 4.9%, the highest since the start of the monetary union in 1999.”

Going on, the report mentioned that “This means that market participants do not expect inflation to return to the Fed's 2% inflation target in the medium to long term. Should the higher inflation become entrenched and the central banks fail to react appropriately to it, gold would probably benefit from this as an inflation hedge. According to a study by the World Gold Council, gold stands out with its price performance in phases of high inflation (inflation >5%). Even with inflation rates between 2% and 5%, the performance of gold is still significantly positive."

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 of the popular ETFs. GLD and IAU carry a Zacks ETF Rank #3 (Hold) and have a Medium-risk outlook (read: Forget Chocolates & Diamonds, Gift 4 ETFs to Your Valentine).

TIPS ETFs at Rescue

TIPS ETFs offer robust real returns during inflationary periods, unlike their unprotected peers in the fixed-income world. It 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 have 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 (read: Why Reopening-Friendly ETFs Can be Bought on the Dip?).

Bitcoins Gaining Popularity as ‘Digital Gold’

According to The Guardian report, bitcoin is generally seen as an alternative to the traditional safe-haven investment — gold. Some analysts also expect to see tough competition between both assets in the near future. According to the market pundits, growing retail interest in bitcoin may soon be observed as a form of digital gold. In fact, investors can consider the first fund to track the ProShares Bitcoin Strategy ETF (BITO - Free Report) (read: ETFs to Win or Lose on Hawkish Fed Minutes).

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