Inflation is coming. The only unknowns about this are how soon will inflation jump higher and just how bad it will get. No matter what the outcome, now is a good time take a closer look at the best ETFs to buy for inflation.
At the moment, the Fed doesn’t seem to be worried about inflation, but this may be a problem for capital markets. Just last week, Fed chair Jerome Powell said he didn’t see inflation reaching beyond 2.2% and that it would be “transitory.” In translation, the Fed thinks inflation will be moderate and short-lived; thus, they can maintain their low rate policy at least until the end of 2023.
Put simply, the central bank won’t be fighting inflation, thereby giving it a free run. And neither the stock market, nor fixed income investments, are reacting well to this scenario.
No matter what eventuality comes over the next several months, it’s wise for investors to prepare for an inflationary environment.
With that in mind, we highlight some of the top inflation exchange-traded funds to buy now:
- iShares TIPS Bond ETF (NYSEARCA:TIP)
- Invesco Dynamic Leisure & Entertainment ETF (NYSEARCA:PEJ)
- Vanguard Real Estate ETF (NYSEARCA:VNQ)
- SPDR Gold Shares (NYSEARCA:GLD)
- Energy Select Sector SPDR Fund (NYSEARCA:XLE)
- Vanguard Financials Index Fund ETF Shares (NYSEARCA:VFH)
- Technology Select Sector SPDR Fund (NYSEARCA:XLK)
Best ETFs to Buy for Coming Inflation: iShares TIPS Bond ETF (TIP)
Expenses: 0.19%, or $19 for every $10,000 invested
Any good list of exchange-traded funds to buy for inflation will include a fund like iShares TIPS Bond ETF.
Although buying a bond fund in an inflationary environment might seem counterintuitive to the experienced investor, a fund that holds Treasury inflation-protected securities (TIPS) can be a smart move.
TIPS are indexed to inflation. Although there is still interest rate risk, TIPS will generally perform better than an aggregate bond index when inflation is on the rise.
Invesco Dynamic Leisure & Entertainment ETF (PEJ)
When inflation is rising, consumer discretionary stocks can perform better than the broader market indexes. Coupled with the prospects of a post-Covid economic reopening later in 2021, an ETF like Invesco Dynamic Leisure & Entertainment could be one of the best exchange-traded funds to buy now.
If you want a slice of the consumer discretionary sector that focuses on hotels, movie theaters and theme parks, PEJ is one of the best ETFs to buy. Although inflation can pose a threat to stocks and bond prices in general, consumers won’t care about inflation when they’re free to roam the country and spend money in a post-Covid world.
The fund’s holdings are concentrated on just 40 consumer discretionary stocks that could benefit when consumers start spending more on travel and leisure. Examples of PEJ holdings include Airbnb (NASDAQ:ABNB), The Walt Disney Company (NYSE:DIS) and AMC Entertainment Holdings (NYSE:AMC).
Vanguard Real Estate Index Fund ETF Shares (VNQ)
The investor herd tends to favor physical assets when inflation is heating up and Vanguard Real Estate ETF stands to benefit from this historic trend.
During inflationary environments, investors like real estate not only because of potential for price increases but because of its income generating qualities.
The VNQ portfolio tracks the MSCI US Investable Market Real Estate 25/50 Index, which consists of 174 stocks spread across a range of real estate investment trusts. These stocks cover real estate areas including specialized REITs and industrial, retail, hotel, and health care REITs.
SPDR Gold Shares (GLD)
Gold has long been a popular inflation hedge for investors and SPDR Gold Shares is one of the best ETFs to buy for this idea.
Although shareholders of GLD don’t hold physical gold, they are able to track the price of gold bullion, which is the primary purpose of buying a gold ETF. Thus, GLD investors are provided a means of participating in the gold bullion market, at a reasonable expense, without taking physical delivery of gold.
In addition to making a good inflation hedge, gold ETFs also make a smart defensive investment because prices can remain stable or rise amidst market uncertainty and volatility.
Energy Select Sector SPDR Fund (XLE)
Energy is another sector that can be smart to hold during inflationary periods and Energy Select Sector SPDR is the largest ETF of its kind on the market.
While energy stocks are smart holdings now, investors looking at XLE now should take note of large run in price in recent months. Year-to-date, through mid-March 2021, XLE was up 30.7% and the 12-month return was 106.7%. There may be more room to run up but price volatility should be expected in the short term.
Vanguard Financials Index Fund ETF Shares (VFH)
When there’s inflation, rising interest rates are typically part of the economic picture, which makes Vanguard Financials ETF (NYSEARCA:VFH) one of the best ETFs to buy now.
The reason why financial stocks can perform well during inflationary environments is that the corresponding rise in interest rates pushes up profit margins for the big financial companies. Think financials like banks, insurance companies and brokerage firms, all of which you’ll find in the VFH portfolio.
Technology Select Sector SPDR Fund (XLK)
Growth stocks tend to do well during inflationary periods the Technology Select Sector SPDR is an aggressive approach to this idea.
As of late, XLK has seen some downside pressure but this can make for an opportunity to buy shares for those investors that don’t mind the higher relative market risk.
On the date of publication, Kent Thune did not personally hold a position in any of the aforementioned securities, although he holds PEJ, GLD, and XLK in some client accounts. Under no circumstances does this information represent a recommendation to buy or sell securities.