Inflation Protection For Your Portfolio

By Investopedia Staff | February 28, 2012 AAA

While the runaway inflation that had previously gripped countries like Zimbabwe and Argentina is not currently at the forefront on the fear list for investors in U.S, but inflation should not be forgotten. It is a silent danger as a result of the additional billions employed in government bailouts.

A combination of currency and inflation-protected ETFs may be able to protect an investor portfolios if the inflation expectations become real. (To learn more on this concept, be sure to visit our Inflation Tutorial.)

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Bearish on the U.S. Dollar
The PowerShares DB US Dollar Index Bearish (ARCA:UDN) is up 1.48% so far this year. UDN's value increases when the US dollar index is falling. If the US dollar index drops as a result of economic issues, this ETF will provide you with some downside protection.

In Defense of Rising Consumer Prices
The iShares Barclays TIPS Bond Fund (ARCA:TIP) is up about 2.18% in 2012. The TIP fund is linked to a measure of inflation known as the Consumer Price Index (CPI or CPI-U). The CPI measures the prices wage earners, clerical workers or basically 90% of the entire U.S. population pay for a variety of expenses including food, transportation, energy and medical care. With oil prices near $110 per barrel, the increase in fuel prices may cause a jump in inflation, which may cause investors to start buying in anticipation of a fuel cost run up. (To learn more about this important statistic, read Economic Indicators Tutorial: Consumer Price Index.)

Currency Exchange Consideration
The Canadian Dollar has continued to be strong against the US dollar in 2011. As the Canadian dollar has been trading above par. The CurrencyShares Canadian Dollar Trust (NYSE:FXC) has gained around 1.19% so far in 2012. Further weakening in U.S. dollar will have a positive effect on the FXC fund.

Final Thoughts
Rampant inflation in not a certainty, but the ETFs mentioned do offer protection should investors notice that prices are beginning to rise once again. (To learn more about these specialized ETFs, read Currency ETFs Simplify Forex Trades and Profit From Forex With Currency ETFs.)

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