Although Inflation is currently stagnating, many believe it will come roaring back with a vengeance within just a few years, after a massive deleveraging takes place, the U.S. labor force participation rate improves, and organic growth returns to the global economy. While there's no need to hit the panic button just yet, disciplined investors can begin planning for inflation, by cultivating ideas for asset classes that do well during inflationary climates.

Key Takeaways

  • Although we are currently not in an inflationary period, we are likely heading towards one.
  • Certain assets perform better than others during inflationary climates.

Assets Tied to Inflation

Back in 2012, Fidelity back-tested nine assets against inflation on a year-to-year basis between 1973 and 2012. While no single asset beat inflation 100% of the time, certain assets performed better than others. The following list sheds light on the behaviors of nine different assets, during inflationary periods.

No. 9: Gold

Based on the study, gold only beats inflation 54% of the time. If you're interested in securing broad exposure to gold in the future, consider SPDR Gold Shares, 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, that includes grain, precious metals, electricity, oil, beef, orange juice, and natural gas, as well as foreign currencies, emissions credits, and certain financial instruments. Fortunately, it's possible to broadly invest in commodities via ETFs. And considering that commodities beat inflation 66% of the time, iShares S&P GSCI Commodity-Indexed Trust is a worth a look.


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 stock/bond portfolio beats inflation 69% of the time. If you don’t want to do the work on your own and you're reluctant to pay an investment advisor to assemble such a portfolio, consider investing in DFA Global Allocation 60/40 I.


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 seek broad exposure to real estate to go along with a low expense ratio, consider the Vanguard REIT ETF.


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. Interestingly, if you pull up a max chart comparison for VNQ and the S&P 500, you will discover that they trade nearly in tandem, with the S&P 500 marginally leading the way, most of the time. This makes sense, given that the S&P 500 beats inflation 70% of the time, which is slightly better than VNQ. If you wish to invest in the S&P 500, or if you favor an ETF that tracks it for your watch list, look into SPDR S&P 500 ETF.


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.)


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. So if you want exposure, consider iShares Core U.S. Aggregate Bond ETF, 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, consider PowerShares Senior Loan 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

There should be no surprise here, after all, Treasury inflation-protected securities (TIPS), are indexed to inflation in order to explicitly protect investors. Consequently, TIPS beat inflation 80% of the time, making it best of breed in this category. If you favor using an ETF as your vehicle, the three choices below might appeal to you. The first two track the Barclays U.S. Treasury Inflation Protected Securities Index, while the last 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 won't likely see rampant inflation for several years, therefore these investments aren’t necessarily prudent today. But keeping these asset classes on your watch list, and then striking when you see inflation begin to take shape in a real, organic growth economy, can help your portfolio thrive when inflation ultimately hits.

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