With the economy in a coma, the U.S. government and Federal Reserve gave the prescribed a hefty dose of medicine: stimulus plans, tax rebates and various other programs all with the intention of jump-starting the economy's heart. While these programs seem to be working and the economy is slowly regaining some of its former steam, no good deed goes unpunished. In this case, this flood cash has the potential to create the ultimate wealth destroyer - inflation.
IN PICTURES: Learn To Invest In 10 Steps

The Growing Problem
Inflation isn't a guarantee. However, the possibility is gaining momentum. This uncertainty towards an inflationary environment stems from the notion of rising commodity prices and a falling dollar. Prices of raw materials have been on a tear in 2009. The broad-based commodity index ETF, the iShares S&P GSCI Commodity-Indexed Trust (NYSE:GSG) is up nearly 9% year to date, after its 46% drop in 2008. Much of this growth is coming from emerging markets, such as China, which are continuing to buy natural resources at an unprecedented speed to build out their nations. Analysts believe that once the world's economy returns to a state of normalcy, buying will intensify globally, pushing commodity prices even higher. With last summer's $150 a barrel for oil still fresh in our minds, we can see how this is major concern.

The second piece to the puzzle is in that of a falling U.S. dollar. A declining greenback first causes imports to be more expensive, adding to an inflationary environment and rising prices. Secondly, oil, gold, cotton and everything else under the commodity umbrella is priced in U.S. dollars, worldwide. A falling dollar ultimately leads to higher prices.

Purchasing Insurance
Long-term inflation is a given. In the short term, the question is severity. Luckily, there are a few ways for investors to protect their portfolios from its cold hand. In 1997, the U.S. created Treasury Inflation Protected Securities (TIPS). These bonds, backed by the full faith and credit of the federal government, provide a fixed coupon plus a rate that is adjusted based on changes in the Consumer Price Index. This prevents erosion of purchasing power. The easiest way to add TIPS bonds to your portfolio is through exchange traded funds. There are two ETFs that provide exposure, the biggest being the iShares Barclays TIPS Bond (NYSE:TIP), with nearly $15 billion in assets, followed by the SPDR Barclays Capital TIPS (NYSE:IPE) with $301 million. Both funds provide some benefits over individual TIPS, including the payment of monthly dividends over the bonds semi-annual payments. The funds charge 0.2% and 0.18% in expenses, respectively, and each yield around 2%.

Other nations have followed suit with the success of the TIPS product. The SPDR DB Intl Government Inflation-Protected Bond (NYSE:WIP) gives investors a chance to diversify their inflation investments outside the United States. Top holdings include inflation bonds from France, Poland, Mexico and Japan.

Profiting From the Falling Dollar
Adding protection for a continuing falling dollar is another inflation insurance device. The PowerShares DB U.S. Dollar Index Bearish ETF (NYSE:UDN) is designed to duplicate the performance of being short the U.S. dollar against a basket of foreign currencies. These include the, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona, Swiss Franc and a nearly 57% weighting in the Euro. The fund allows investors to make a direct and decisive bet that the greenback will go down. The fund is up around 2% year-to-date, and charges 0.55% in expenses.

The Bottom Line
With the world's economies beginning to show signs of growth, the risks of inflation are being pushed to the forefront once again. Insurance against higher prices is selling cheap. Now may be the time to purchase some protection, both for the short term and long term. These ETFs, including the iShares S&P GSCI Commodity-Indexed Trust (NYSE:GSG), offer an easy and cheap way to protect purchasing power. (To learn more, check out our Inflation Tutorial.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Mutual Funds & ETFs

    Why ETFs Are a Smart Investment Choice for Millennials

    Exchange-traded funds offer an investment alternative to cost-conscious millennials who want to diversify their portfolios with less risk.
  2. Stock Analysis

    Will J.C. Penney Come Back in 2016? (JCP)

    J.C. Penney is without a doubt turning itself around, but that doesn't guarantee the stock will respond immediately.
  3. Mutual Funds & ETFs

    Should Investors Take a BITE Out of This New ETF?

    ETF BITE offers a full menu of restaurants. Is now the right time to invest?
  4. Economics

    Why It Is Important to Follow Crude Oil Inventories

    Discover what oil inventories are, how they are communicated and what important insights they provide into the state of the oil market.
  5. Financial Advisors

    5 Things All Financial Advisors Should Know About ETFs

    Discover five things all financial advisors should know about ETFs, including when ETFs may be a better choice for your clients than mutual funds.
  6. Stock Analysis

    The Top 5 ETFs to Track the Nasdaq in 2016

    Check out five ETFs tracking the NASDAQ that investors should consider heading into 2016, including the famous PowerShares QQQ Trust.
  7. Investing

    Time to Bring Active Back into a Portfolio?

    While stocks have rallied since the economic recovery in 2009, many active portfolio managers have struggled to deliver investor returns in excess.
  8. Chart Advisor

    Now Could Be The Time To Buy IPOs

    There has been lots of hype around the IPO market lately. We'll take a look at whether now is the time to buy.
  9. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  10. Chart Advisor

    Copper Continues Its Descent

    Copper prices have been under pressure lately and based on these charts it doesn't seem that it will reverse any time soon.
  1. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  2. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
  3. Do ETFs pay capital gains?

    Exchange-traded funds (ETFs) can generate capital gains that are transferred to shareholders, typically once a year, triggering ... Read Full Answer >>
  4. How do real estate hedge funds work?

    A hedge fund is a type of investment vehicle and business structure that aggregates capital from multiple investors and invests ... Read Full Answer >>
  5. Are Vanguard ETFs commission-free?

    While some Vanguard exchange-traded funds (ETFs) are available commission-free from third-party brokers, a large portion ... Read Full Answer >>
  6. Do Vanguard ETFs require a minimum investment?

    Vanguard completely waives any U.S. dollar minimum amounts to buy its exchange-traded funds (ETFs), and the minimum ETF investment ... Read Full Answer >>

You May Also Like

Trading Center