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Hedging Inflation Risk with ETFs

#inflation #CPI #hedging #risk #ETFs #stocks #bonds #growth #value #bitcoin #cryptocurrencies


For much of Y 2021 inflation has been in the background spooking some equity and bond ETFs.

But October’s CPI reading is the latest sign that this threat to market stability is growing. Consumer prices jumped 6.2% from last yr, hitting a 31yr high.

Inflation could be disastrous to some portfolios as it tightens the correlation between stocks and bonds closer together at the wrong time.

While a moderate amount of inflation is good for stocks, surging costs can hurt a company’s profits. And rising rates can weigh particularly heavy on growth stocks, as these valuations tend to be sensitive to investors’ perception of future inflation.

While stock markets have so far shaken off inflation fears, continuing their ascent, the bond market has not been quite as lucky. Rising rates negatively impact bonds due to the inverse relationship between prices and yields.

The good news is that ETF investors have options when it comes to allocating to areas of the market that hedge against inflation risk. Several of these “inflation hedge” assets have offered protection this yr as the reality of inflation grows.

The SPDR Gold Trust (GLD) tracks the spot price of gold, which is often hailed as a proven inflation hedge. That said, the precious metal has not held up so far this year, notching a 2.7% loss YTD.

Some analysts speculate that gold may have lost a bit of its shine as an inflation hedge due to the growing acceptance of bitcoin and other cryptocurrencies.

While bitcoin futures ETFs do not have a long enough track record to assess their usefulness as an inflation hedge, the WisdomTree Enhanced Commodity Strategy Fund (GCC) became the 1st ETF to offer exposure to bitcoin futures, adding a 3% allocation in mid-October.

GCC actively manages its exposure to commodities and can hold up to a 5% allocation in bitcoin futures.

Have a prosperous day, Keep the Faith!

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Paul A. Ebeling, a polymath, excels, in diverse fields of knowledge Including Pattern Recognition Analysis in Equities, Commodities and Foreign Exchange, and he is the author of "The Red Roadmaster's Technical Report on the US Major Market Indices, a highly regarded, weekly financial market commentary. He is a philosopher, issuing insights on a wide range of subjects to over a million cohorts. An international audience of opinion makers, business leaders, and global organizations recognize Ebeling as an expert.