As U.S. economy continues to struggle, another round of quantitative easing is being mulled over by the Federal Reserve. Policy makers are considering another round of debt purchases and analysts estimate that the Fed could purchase up to $2 trillion more in assets with the hope of stimulating the U.S. economy. This second major round of easing and other efforts to stimulate the stagnant economy have renewed many investors' worries about high inflation.

IN PICTURES: Eight Ways To Survive A Market Downturn

A Negative Yield
These inflation worries have come to a head with the recent auction of Treasury Inflation Protected Securities (TIPS). The Treasury Department sold $10 billion in five-year TIPS bonds this past Monday at a negative 0.55% yield. This is the first time the yield on maturity has been below zero. Bidders offered to pay $2.84 for each $1 of debt sold. Investors are willing to pay more and lose money in the short run, implying that inflation will be high enough to warrant the protection these bonds offer. Investments like the iShares Barclays TIPS Bond (NYSE:TIP) have become immensely popular with investors as a way to gain inflation protection. However, these bonds might not be the best all inclusive way to protect against inflation.

The main inflation gauge, the consumer price index and TIPS tend to have low correlations to each other. From 2002 to 2009, the correlation between the two was just 0.21% according to a recent article in the Wall Street Journal. This is troubling for an asset that is designed to protect against increases in the CPI. In addition, if inflation were to skyrocket very quickly, the fed could raise rates abruptly. In that scenario, TIPS bonds might beat standard Treasuries, but not many other asset classes.

A Variety of Protection Options
Overall, TIPS bonds still represent a good backbone for an inflation fighting portfolio, but they shouldn't be the only choice. There are a host of different asset classes that can be tapped to provide inflation protection. Here is a portfolio of options.

Having a 0.63 correlation to the CPI from 2002 to 2009, commodities make a good case as an inflation fighter. There are plenty of ways for investors to add a basket of commodities to a portfolio. For equities involved in the production of hard assets, the iShares S&P North America Natural Resources (NYSE:IGE) follows a basket of 130 different commodity based stocks with its highest concentration in oil and metals. These groups performed well during the inflation ravaged 1970's. The fund charges a cheap 0.48% in expenses and yields 1.06%. Similarly, the SPDR S&P Global Natural Resources (NYSE:GNR) offers a global play on this theme. The PowerShares DB Commodity Index (NYSE:DBC) follows a basket of various commodity futures contracts.

Another way to play rising inflation is through foreign currencies. As inflation devalues the greenback, investors will favor currencies from other nations who are keeping inflation in check. The PowerShares DB US Dollar Index Bearish (NYSE:UDN) makes a single easy bet that the dollar will fall. The Swiss franc, which is seen as a safe haven, can be accessed through the CurrencyShares Swiss Franc Trust (NYSE:FXF). Finally, combining the commodity theme with foreign currency, the WisdomTree Dreyfus Commodity Currency (NYSE:CCX) holds currency positions in nations such as Australia, Norway and Brazil, that will benefit from strong long term prices from their rich natural resource reserves.

Another great inflation fighter that many investors already own; large cap dividend stocks. From 1975 through 1980, when inflation was as high as 14.4%, large cap stocks gained nearly 38%, trouncing inflation. The most popular dividend option is the iShares Dow Jones Select Dividend Index (NYSE:DVY) which yields 3.67%.

Bottom Line
With another round of quantitative easing almost assured, inflation has returned to investors minds in a big way. The recent negative TIPS yield sold at auction proves how serious the potential problem is. However, there are plenty of other options for investors to fight inflation. Commodities, foreign currencies and dividend stocks are perfect tools for an inflation fighting portfolio. (To learn more, see Inflation Protected Securities - The Missing Link.)

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

Related Articles
  1. Investing News

    Latest Labor Numbers: Good News for the Market?

    Some economic numbers are indicating that the labor market is outperforming the stock market. Should investors be bullish?
  2. Investing News

    Stocks with Big Dividend Yields: 'It's a Trap!'

    Should you seek high yielding-dividend stocks in the current investment environment?
  3. Investing News

    Should You Be Betting with Buffett Right Now?

    Following Warren Buffett's stock picks has historically been a good strategy. Is considering his biggest holdings in 2016 a good idea?
  4. Products and Investments

    Cash vs. Stocks: How to Decide Which is Best

    Is it better to keep your money in cash or is a down market a good time to buy stocks at a lower cost?
  5. Investing News

    Who Does Cheap Oil Benefit? See This Stock (DG)

    Cheap oil won't benefit most companies, but this retailer might buck that trend.
  6. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  7. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
  8. Investing News

    Today's Sell-off: Are We in a Margin Liquidation?

    If we're in market liquidation, is it good news or bad news? That party depends on your timeframe.
  9. Investing News

    Bank Stocks: Time to Buy or Avoid? (WFC, JPM, C)

    Bank stocks have been pounded. Is this the right time to buy or should they be avoided?
  10. Stock Analysis

    Why the Bullish Are Turning Bearish

    Banks are reducing their targets for the S&P 500 for 2016. Here's why.
RELATED FAQS
  1. 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 >>
  2. 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 >>
  3. 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 >>
  4. 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 >>
  5. 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 >>
  6. Can mutual fund expense ratios be negative?

    Mutual fund expense ratios cannot be negative. An expense ratio is the sum total of all fees charged by an asset management ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center