What Are 9 Top Assets for Protection Against Inflation?

A dollar today will not buy the same value of goods in 10 years. This is due to inflation. Inflation measures the average price level of a basket of goods and services in an economy. It is the increase in prices over a period where a specific amount of currency will be able to buy less than before.

Inflation is a natural occurrence in the market economy, and a disciplined investor can plan for inflation by cultivating ideas for asset classes that outperform the market during inflationary climates.

Understanding 9 Top Assets for Protection Against Inflation

The level of inflation in an economy changes depending on current events. Rising wages and rapid increases in raw materials, such as oil, are two factors that contribute to inflation.

Key Takeaways

  • Inflation occurs in market economies, but investors can plan for inflation by investing in asset classes that tend to outperform the market during inflationary climates.
  • With any diversified portfolio, keeping inflation-hedged asset classes on your watch list, and then striking when you see inflation can help your portfolio thrive when inflation hits.
  • Common anti-inflation assets include gold, commodities, various real estate investments, and TIPS.

Keeping inflation-hedged 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 hits.

9. Gold

Gold has often been considered a hedge against inflation. In fact, many people have looked to gold as an "alternative currency," particularly countries whose currency is losing value. These countries tend to utilize gold or other strong currencies when their own currency has failed. Gold is a real, physical asset, and tends to hold its value for the most part.

However, gold is not a true perfect hedge against inflation. When inflation rises, central banks tend to increase interest rates as part of monetary policy. Holding onto an asset like gold that pays no yields is not as valuable as holding onto an asset that does, particularly when rates are higher, meaning yields are higher.

There are better assets to invest in when aiming to protect yourself against inflation. But like any strong portfolio, diversification is key, and if you are considering investing in gold, the SPDR Gold Shares ETF (GLD) is a worthwhile consideration.

 

Net Assets 4/13/2020

 

$54.5 billion

 

Expense Ratio

 

0.40%

 

Average Daily Trading Volume

 

14,804,343

 

5-Year Trailing Returns

 

5.43%

8. Commodities

Commodities are a broad category that includes grain, precious metals, electricity, oil, beef, orange juice, and natural gas, as well as foreign currencies, emissions, and certain other financial instruments. Commodities and inflation have a unique relationship, where commodities are an indicator of inflation to come. As the price of a commodity rises, so does the price of the products that the commodity is used to produce.

Fortunately, it's possible to broadly invest in commodities via exchange traded funds (ETFs). The iShares S&P GSCI Commodity-Indexed Trust (GSG) is a commodity ETF worth considering.

 

Net Assets 4/13/2020

 

$513 million

 

Expense Ratio

 

0.75%

 

Average Daily Trading Volume

 

866,312

 

5-Year Trailing Returns

 

-13.76%

7. 60/40 Stock/Bond Portfolio

A 60/40 stock/bond portfolio is considered to be a safe, traditional mix of stocks and bonds in a conservative portfolio. 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 Dimensional DFA Global Allocation 60/40 Portfolio (I) (DGSIX).

 

Net Assets 4/13/2020

 

$3.5 billion

 

Expense Ratio

 

0.25%

 

Average Daily Trading Volume

 

N/A

 

5-Year Trailing Returns

 

2.25%

6. Real Estate Investment Trusts (REITs)

Real estate investment trusts (REITs) are companies that own and operate income-producing real estate. Property prices and rental income tend to rise when inflation rises. A REIT consists of a pool of real estate that pays out dividends to its investors. If you seek broad exposure to real estate to go along with a low expense ratio, consider the Vanguard Real Estate ETF (VNQ).

 

Net Assets 4/13/2020

 

$67 billion

 

Expense Ratio

 

0.12%

 

Average Daily Trading Volume

 

8,945,461

 

5-Year Trailing Returns

0.47%

5. S&P 500

Stocks offer the most upside potential in the long-term. If you wish to invest in the S&P 500, an index of the 500 largest U.S. public companies, or if you favor an ETF that tracks it for your watch list, look into SPDR S&P 500 ETF (SPY).

 

Net Assets

 

$252 billion

 

Expense Ratio 4/13/2020

 

0.0945%

 

Average Daily Trading Volume

 

166,614,512

 

5-Year Trailing Returns

 

6.66%

4. Real Estate Income

Real estate income is income earned from renting out a property. Real estate works well with inflation, as inflation rises, so do property values, and so does the amount a landlord can charge for rent, earning higher rental income over time. This helps to keep pace with the rise in inflation. For future exposure, consider VanEck Vectors Mortgage REIT Income ETF (MORT).

 

Net Assets 4/13/2020

 

$109 million

 

Expense Ratio

 

0.42%

 

Average Daily Trading Volume

 

200,780

 

5-Year Trailing Returns

 

-9.20%

3. Bloomberg Barclays Aggregate Bond Index

The Bloomberg Barclays Aggregate Bond Index is a market index that measures the U.S. bond market. All bonds are covered in the index: government, corporate, taxable, and municipal bonds. To invest in this index, investors can invest in funds that aim to replicate the performance of the index. There are many funds that track this index, one of them being the iShares Core U.S. Aggregate Bond ETF (AGG).

 

Net Assets 4/13/2020

 

$69 billion

 

Expense Ratio

 

0.04%

 

Average Daily Trading Volume

 

8,941,358

 

5-Year Trailing Returns

 

3.28%

2. Leveraged Loans

A leveraged loan is a loan that is made to companies that already have high levels of debt or a low credit score. These loans have higher risks of default and therefore are more expensive to the borrower.

Leveraged loans as an asset class are typically referred to as collateralized loan obligations (CLOs). These are multiple loans that have been pooled into one security. The investor receives scheduled debt payments from the underlying loans. CLOs typically have a floating rate yield, which makes them a good hedge against inflation. If you're interested in this approach at some point down the road, consider Invesco Senior Loan ETF (BKLN).

 

Net Assets 4/13/2020

 

$3.8 billion

 

Expense Ratio

 

0.65%

 

Average Daily Trading Volume

 

10,769,067

 

5-Year Trailing Returns

 

1.04%

1. TIPS

Treasury inflation-protected securities (TIPS), a type of U.S. Treasury bond, are indexed to inflation in order to explicitly protect investors from inflation. Twice a year, TIPS pay out on a fixed rate. The principal value of TIPS changes based on the inflation rate, therefore, the rate of return includes the adjusted principal. TIPS come in three maturities: five-year, 10-year, and 30-year.

If you favor using an ETF as your vehicle, the three choices below might appeal to you.

The iShares TIPS Bond ETF (TIP)

 

Net Assets 4/13/2020

 

$19 billion

 

Expense Ratio

 

0.19%

 

Average Daily Trading Volume

 

3,251,967

 

5-Year Trailing Return

 

2.45%

The Schwab US TIPS ETF (SCHP)

 

Net Assets 4/13/2020

 

$8.6 billion

 

Expense Ratio

 

0.050%

 

Average Daily Trading Volume

 

1,259,164

 

5-Year Trailing Returns

 

2.58%

The FlexShares iBoxx 3-Year Target Duration TIPS Index ETF (TDTT)

 

Net Assets 4/13/2020

 

$1.1 billion

 

Expense Ratio

 

0.18%

 

Average Daily Trading Volume

 

107,043

 

5-Year Trailing Returns

 

1.62%