Inflation is out; deflation is in. But inflation is eventually going to make a triumphant return to the markets. This will likely be several years from now, after a massive deleveraging takes place, the U.S. labor force participation rate improves, and organic growth returns to the global economy.

The bad news is that the deflationary environment we’re going to see will likely last years — not months. Then, due to the previously-instated monetary policies and organic growth, we’ll see rampant inflation. This is good news for employment and for people invested in the right assets ahead of it, but it’s bad news for consumers since prices for goods and services will move higher. But you can also argue that inflation is healthy because it usually comes with economic growth. If incomes are moving higher, then higher costs will be more affordable. (For more, see: Should You Worry About the U.S. Inflation Rate?)

Assets Tied to Inflation

It's probably wise to avoid assets that are closely tied to inflation right now. Contrary to popular belief, the reason the Federal Reserve and other central banks around the world have kept interest rates low is because they have been fighting against deflation. Unfortunately, all this has done is kick the can down the road while adding excessive debts. When growth slows due to the reduced impact of central bank policies, those debts will be very difficult to pay off, which will be the beginning of economic contraction. When corporations can’t pay these debts, they will lay off employees. When employees are cut, consumer spending is reduced. There is nothing inflationary about this scenario. But …

A savvy investor keeps ahead of a trend change. This is how investors maximize their potential. This change might not take place for a while, but it will take place, and it could present one of the best investment opportunities to occur in a long time. For example, gold won’t perform well in a deflationary environment and is likely to suffer in the coming years, but the low prices we'll be seeing may present an exceptional buying opportunity since gold will eventually have the potential to see record highs. (For more, see: How Safe Are Gold and Silver Investments?

Gold will eventually be exciting, but according to a study by Fidelity Investments, it’s not the best asset to own in an inflationary environment. Back in 2012, Fidelity back-tested nine assets against inflation on a year-to-year basis between 1973 and 2012. No asset beat inflation 100% of the time, but there was a big difference in regards to which assets performed better at beating inflation.

Here's the list. We’ll start with No. 9 and work our way down. 

All numbers below as of Aug. 11, 2015.

No. 9: Gold

Surprised? Based on the study, gold only beats inflation 54% of the time. However, this isn’t going to dissuade gold bugs, and it shouldn’t — in an inflationary environment. If you want broad exposure to gold in the future, consider SPDR Gold Shares (GLD), which tracks the price of gold bullion.

Net Assets

$23.75 billion

Dividend Yield

N/A

Expense Ratio

0.39%

Average Daily Trading Volume

5,610,170

1-Year Performance

-15.80%

 

No. 8: Commodities

Commodities is a broad category, but there is a way to invest in them in a broad manner. Considering commodities beat inflation 66% of the time, iShares S&P GSCI Commodity-Indexed Trust (GSG) is a worth a quick look. Note the high expense ratio.

Net Assets

$742 million

Dividend Yield

N/A

Expense Ratio

0.82%

Average Daily Trading Volume

205,467

1-Year Performance

-43.89%

 

No. 7: 60/40 Stock/Bond Portfolio

A 60/40 portfolio beats inflation 69% of the time. If you don’t want to do the work on your own and if you don’t want to pay an investment advisor for help creating it, you can invest in DFA Global Allocation 60/40 I (DGSIX). (For related reading, see: Which Asset Allocation Is Best?)

Net Assets

$2.97 billion

Dividend Yield

1.91%

Expense Ratio

0.29%

Average Daily Trading Volume

N/A

1-Year Performance

-0.19%

 

No. 6: REITs/Real Estate Equity

Real estate equity/real estate investment trusts also beat inflation 69% of the time. If you want broad exposure to real estate to go along with a low expense ratio, then look into Vanguard REIT ETF (VNQ).

Net Assets

$49.88 billion

Dividend Yield

3.86%

Expense Ratio

0.12%

Average Daily Trading Volume

4,052,730

1-Year Performance

+3.54%

 

No. 5: S&P 500

Stocks offer the most upside potential. Unfortunately, right now isn’t likely the best time to own stocks as not many hold up in a deflationary environment. Interestingly, if you pull up a max chart comparison for VNQ and the S&P 500, you will see that they almost trade in tandem, with the S&P 500 leading the way by a slight margin most of the time. This makes sense since the S&P 500 beats inflation 70% of the time, which is slightly better than VNQ.

If you want to invest in the S&P 500, or if you want an ETF that tracks it for your watchlist, look into SPDR S&P 500 ETF (SPY).

Net Assets

$176.92 billion

Dividend Yield

1.92%

Expense Ratio

0.09%

Average Daily Trading Volume

106,640,000

1-Year Performance

+7.10%

 

No. 4: Real Estate Income

Real estate income beats inflation 71% of the time. For future exposure, consider Market Vectors Mortgage REIT Income ETF (MORT). (For related reading, see: 7 Sectors for Diversified REITs.)

Net Assets

$114.99 million

Dividend Yield

10.49%

Expense Ratio

0.40%

Average Daily Trading Volume

42,127

1-Year Performance

-12.86%

 

No. 3: Barclays Aggregate Bond Index

The Barclays Aggregate Bond Index beats inflation 75% of the time. Logically, if you want exposure, consider iShares Core U.S. Aggregate Bond ETF (AGG), which tracks the index.

Net Assets

$25.69 billion

Dividend Yield

2.32%

Expense Ratio

0.07%

Average Daily Trading Volume

1,866,420

1-Year Performance

-0.13%

 

Bond Rating Breakdown (% of assets):

AAA

72.47%

AA

3.35%

A

11.33%

BBB

12.85%

 

No. 2: Leveraged Loans

Leveraged loans outpace inflation 79% of the time. If interested in this approach at some point down the road, look at PowerShares Senior Loan ETF (BKLN). (For more, see: Three Key Elements of a Bond ETF.)

Net Assets

$5.43 billion

Dividend Yield

3.94%

Expense Ratio

0.64%

Average Daily Trading Volume

2,204,830

1-Year Performance

-4.27%

 

Bond Rating Breakdown (% of assets):

AAA

1.95%

BBB

11.85%

BB

42.91%

B

33.30%

Below B

5.09%

Other

4.90%

 

No. 1: TIPS

No surprise here. TIPS — Treasury inflation-protected securities — are indexed to inflation to protect investors from the negative impact of inflation — beat inflation 80% of the time, making it best of breed in this category. If you want to use an ETF as your vehicle, here are three, the first two of which track the Barclays U.S. Treasury Inflation Protected Securities Index, and the last of which tracks the iBoxx 3-Year Target Duration TIPS Index.

iShares TIPS Bond (TIP)

Net Assets

$13.95 billion

Dividend Yield

0.54%

Expense Ratio

0.20%

Average Daily Trading Volume

545,598

1-Year Performance

-2.57%

 

Schwab US TIPS ETF (SCHP)

Net Assets

$747.69 million

Dividend Yield

0.54%

Expense Ratio

0.07%

Average Daily Trading Volume

65,355

1-Year Performance

-2.74%

 

FlexShares iBoxx 3Yr Target Dur TIPS ETF (TDTT)

Net Assets

$2.12 billion

Dividend Yield

0.39%

Expense Ratio

0.20%

Average Daily Trading Volume

108,247

1-Year Performance

-2.67%

 

The Bottom Line

We're not going to see any sign of rampant inflation for several years. Therefore, these aren’t likely to be great investments right now. The best approach is likely to keep these ideas on your watchlist, then strike when you see inflation beginning to make a return in a real, organic growth economy. (For more, see: Stay Away from These 3 Slumping Sectors.)

Dan Moskowitz does not have any positions in GLD, GSG, DGSIX, VNQ, SPY, MORT, AGG, BKLN, TIP, SCHP or TDTT. 

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