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5 Ways to Hedge Against Inflation With ETFs

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Inflation in the United States was hotter than expected, with the Consumer Price Index rising for the second consecutive month. The index rose 3.7% year over year in August, faster than the 3.2% pace recorded in July and ahead of the Wall Street consensus forecast of 3.6%. On a monthly basis, inflation edged up 0.6%.

While inflation has fallen from a peak of 9.1%, it remains well above the Fed's 2% target despite an aggressive interest rate hike campaign. The central bank has raised interest rates 11 times to the highest level since 2001 over a course of 16 months.

Behind the Inflation Numbers

The rise in consumer prices was driven by higher energy prices and costlier housing. Gasoline prices rose 10.6% from the prior month while oil prices jumped to 2023 highs, driving up transportation costs. Overall, energy prices climbed 5.6% in August from the previous month (read: ETFs to Tap Oil Price Strength).

The shelter index, which accounts for more than half of the monthly increase in inflation, advanced for the 40th consecutive month. Shelter costs rose 0.3% for the month and increased 7.3% over the past year.

Other categories also saw increases. The food index increased 4.3% in August over the last year, with food prices rising 0.2% from last month and 3% from the year-ago month. Auto insurance and airline tickets increased 2.4% and 4.9% in August. Medical care rose 0.2% after falling in July.

The so-called core inflation, which strips out volatile components such as food and energy prices, rose 4.3% from the year-ago level and 0.3% over the past month.

Here’s How to Hedge Against Inflation

Amid the inflationary backdrop, investors should take shelter against rising inflation. While there are several ways to do it, we have highlighted five of them.

TIPS (Treasury Inflation-Protected Securities)

TIPS are bonds issued by the U.S. Treasury whose principal increases with inflation and decreases with deflation. TIPS ETFs offer shelter against rising inflation. These not only combat increasing prices but also protect income for the long term. This is because TIPS pays interest on an inflated principal amount (principal rises with inflation), and thus, the principal amount and interest payments rise with increasing consumer prices.

iShares TIPS Bond ETF (TIP - Free Report) is the most popular choice in the TIPS space, with AUM of $21.4 billion and an average daily volume of 3 million shares. It tracks the ICE US Treasury Inflation Linked Bond Index, holding 48 securities in its basket. The fund has an effective duration of 6.63 years and an average maturity of 7.18 years. It charges 19 bps in fees per year.


Commodities are often considered a hedge against inflation as they typically rise when inflation is accelerating and offer protection from the effects of higher prices. Though there are several options to bet in the commodity world, Invesco DB Agriculture Fund (DBA - Free Report) is the broader way to play the space (read: A Guide to Higher Interest Rates and ETFs).

Invesco DB Agriculture Fund tracks the DBIQ Diversified Agriculture Index Excess Return, a rules-based index composed of futures contracts on some of the most liquid and widely traded agricultural commodities. It has key holdings in sugar, cocoa, live cattle and soybeans, with double-digit exposure each. Invesco DB Agriculture Fund charges 91 bps on an annual basis and trades in a volume of 523,000 shares a day. It has amassed $838.6 million in its asset base.

Floating Rate Bonds

Floating rate bonds are investment grade having interest payments that adjust with short-term rates, which tend to rise during inflationary periods. As such, these bonds are ideal for protecting investors against capital erosion in a rising rate environment. The most popular option is iShares Floating Rate Bond ETF (FLOT - Free Report) . It follows the Bloomberg US Floating Rate Note < 5 Years Index and holds 338 securities in its basket. It has an average maturity of 1.72 years and an effective duration of 0.02 years. iShares Floating Rate Bond ETF focuses on better quality notes, with 90% of them rated A or higher.

iShares Floating Rate Bond ETF has amassed $7.3 billion in its asset base while trading in a volume of 1 million shares per day on average. It charges 15 bps in annual fees.

Real Estate

Real estate often appreciates during inflationary times, as it's a tangible asset. There will always be a demand for homes, regardless of the economic climate. This is because as inflation rises, so do property values and the amount a landlord can charge for rent. Vanguard Real Estate ETF (VNQ - Free Report) follows the MSCI US Investable Market Real Estate 25/50 Index and holds 164 stocks in its basket. Industrial REITs, retail REITs and Telecom Tower REITs round off the top three positions with double-digit exposure each. Vanguard Real Estate ETF has an expense ratio of 0.12%.

Vanguard Real Estate ETF is the most popular and liquid ETF, with AUM of $31.8 billion and an average daily volume of around 4.3 million shares a day. It has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: ETF Areas in Focus as US Credit Card Balance Crosses $1T).

Dividend Growth

Companies that consistently grow their dividends can offer protection against inflation, as they may continue to increase dividends at or above the rate of inflation. Vanguard Dividend Appreciation ETF (VIG - Free Report) is the largest and the most popular ETF in the dividend space, with AUM of $68.8 billion and an average daily volume of 1 million shares. The fund follows the S&P U.S. Dividend Growers Index, which is composed of large-cap stocks that have a record of raising dividends every year.

Vanguard Dividend Appreciation ETF holds 314 securities in the basket, with key holdings in industrials, technology, healthcare, financials and consumer discretionary. The fund charges 6 bps in annual fees and has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook.

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