Begany's Bets: Four Inflation Hedges

12/15/2016 9:00 am EST

Focus: STRATEGIES


Owning inflation hedges is like buying insurance—you may never need them, but they’re good to have in your portfolio just in case, suggests Tim Begany, contributing editor of Investing Daily's Personal Finance.

To help you prepare, we’ve stocked the Fund Portfolio with four exchange-traded funds of assets with a history of performing well as inflation rises:

  • SPDR Gold Shares (GLD)
  • SPDR DB Int’l Government Inflation-Protected Bond (WIP)
  • PowerShares DB Agriculture (DBA)
  • iShares Residential Real Estate Capped (REZ)

All four are effective inflation hedges, but with inflation so scant, the group has mostly posted losses the past three years, including the PowerShares fund’s 6.4% annualized loss.

The SPDR gold and inflation-protected bond funds fell 0.6% and 1.9% a year, respectively, in that time.

However, tepid inflation hasn’t hindered the iShares real estate fund, which soared about 11% annually the past three years, beating 99% of its peer group.

Because many investors prefer physical assets to “paper investments” like stocks and bonds, real estate is profitable in most economic climates. So this is one investment that can add to your portfolio’s return no matter what.

With their returns linked to consumer price changes, inflation-protected bonds chronically underperform when inflation is low.

So does gold, as there’s less incentive to buy it if currencies aren’t losing much purchasing power.

Demand for coffee beans, wheat and other agricultural goods weakens when inflation is low because buyers aren’t as worried about stocking up before prices rise.

Owing to its appeal as an alternative currency, gold also usually does well when inflation surges. Agricultural commodities do, too, because as groceries go up in price, so does the cost of the ingredients used to produce them.

SPDR Gold Shares is perfect if you prefer investing directly in gold than in companies that mine the metal. The $40 billion fund has nearly 31 million ounces of bullion, stored mainly in bank vaults in England.

As a shareholder, you don’t receive gold from the fund, but you do get precision tracking of the metal’s price movements.

PowerShares DB Agriculture is a portfolio of the most-sought-after agricultural commodities, such as wheat, corn, coffee beans and live cattle.

Although low inflation has hampered the fund, its three-year track record still beats 60% of its peers, and its 0.85% expense ratio is far cheaper than the 2.2% category average.

The main appeal of the SPDR inflation-protected bond fund: It’s a large, globally diversified basket of safer investment-grade government bonds, some of which carry hefty coupons because they’re from regions where inflation is already high.

Substantial allocations to Brazil, South Africa and other countries where inflation runs hotter helped the SPDR International Government Inflation-Protected fund beat 88% of its peers the past five years.

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By Tim Begany, Contributing Editor of Investing Daily's Personal Finance

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