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ETF Strategies to Tackle Persistently High U.S. Inflation Levels

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The world’s largest economy continues to struggle with the persistently high-inflation levels. Per the latest Labor Department report, the Consumer Price Index (CPI) jumped 8.3% year over year in April, surpassing the already high Dow Jones estimate of an 8.1% rise. The metric, however, compared favorably with the 8.5% rise (the maximum since December 1981) in March.

The core inflation index, which excludes volatile components, such as food and energy prices, rose 6.2% year over year, beating the expectations of a 6% rise. The rising inflation levels dashed the hopes of inflation peaking in March.

The continued steep inflation levels are also weighing on consumers’ confidence in the United States. The growing supply-chain disturbances emanating from the ongoing Russia-Ukraine war crisis and the resurging COVID-19 cases in China might trigger concerns over further rising inflation levels.

The Conference Board's measure of consumer confidence index stands at 107.3 in April 2022 compared with 107.6 in March. Moreover, April’s reading missed the consensus estimate of 108, per a Reuters survey of economists. Also, the metric continues to be below the pre-pandemic level of 132.6 achieved in February 2020.

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

Gold ETFs to Hedge Inflation

Considering the current scenario, gold prices have been rising for a while. 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.”

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 the gold prices. The SPDR Gold Shares (GLD - Free Report) and iShares Gold Trust (IAU) are some of the popular ETFs. GLD and IAU carry a Zacks ETF Rank #3 (Hold) with a Medium-risk outlook (read: ETF Areas in Focus Amid the Russia-Ukraine Crisis).

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 highlighted iShares TIPS Bond ETF (TIP - Free Report) and Schwab U.S. TIPS ETF (SCHP), which can be compelling investment choices. TIP and SCHP have a High-risk outlook.

Inflation Beneficiary ETFs to Consider

Investors can keep track of ETFs that seek to hedge against or benefit from inflation. In this regard, the actively-managed Horizon Kinetics Inflation Beneficiaries ETF (INFL - Free Report) is an option that invests in companies expected to benefit from inflation. The Fidelity Stocks for Inflation ETF (FCPI - Free Report) can also be considered as it holds companies with attractive valuations, high-quality profiles and a positive momentum in industries that generally outperform in inflationary environments. The VanEck Inflation Allocation ETF (RAAX) is an actively-managed fund that provides exposure to inflation-fighting assets and can be kept on the radar. RAAX holds ETFs that invest in real assets, including commodities, natural resource equities, REITs, MLPs, gold and bitcoin.

Track REITs ETFs

Investors might frown at the prospect of investing in REITs amid the rising rate environment. However, these investment vehicles can provide equity exposure while consistently paying dividends and providing good diversification benefits.

Moreover, REITs provide good exposure to growth-oriented areas like data centers and cellphone towers that are well-positioned to gain from an improving economy. Also, REITs are popular for hedging naturally against inflation. Notably, rising property prices and increasing rental income in an inflationary environment make REITs a good investment option.

Investors can therefore keep a track of ETFs like Vanguard Real Estate ETF (VNQ - Free Report) , Schwab US REIT ETF (SCHH - Free Report) , Real Estate Select Sector SPDR Fund (XLRE) and iShares U.S. Real Estate ETF (IYR) (read: Will REITs Continue Their Rise During Interest Rate Hikes?).

Opt for Commodity ETFs

As an asset class, commodities are observed to have a positive correlation with inflation. Moreover, by providing good diversification benefits, they are also found to be uncorrelated with the broader stock market.

It is important to note that commodity ETFs mostly hold futures that could involve roll costs or yields. Therefore, these ETFs are more suitable for short-term trading or hedging activities.

Following are some commodity ETFs that investors can keep close tabs on as the geopolitical crisis worsens: Invesco DB Commodity Index Tracking Fund (DBC - Free Report) , WisdomTree Enhanced Commodity Strategy Fund (GCC - Free Report) , Teucrium Corn Fund (CORN) and Invesco DB Base Metals Fund (DBB).

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