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As Inflation Haunts the Economy, Investment in these 8 Assets can act as a Hedge Against it

From the timeless allure of gold to the stability of 60/40 stock/bond portfolios, each asset class offers a unique refuge for investors.

BY SAGARIKA C

PUBLISHED DEC 29, 2023

A comprehensive guide to 9 asset classes as shields against inflation

As the purchasing power of currency diminishes, strategic investors seek shelter in assets resilient to this economic force. From the timeless allure of gold to the stability of 60/40 stock/bond portfolios and the income potential of real estate, each asset class offers a unique refuge for investors aiming to safeguard their wealth in the face of inflationary pressures. This article navigates through nine distinct asset classes poised to serve as formidable bulwarks against the erosive effects of inflation.

1. Gold

While it's a tangible asset with enduring value, it falls short of being a perfect hedge in times of inflation. Central banks, responding to inflation, tend to hike interest rates, diminishing gold's appeal as it yields no income. Diversification is crucial for a robust portfolio, and if considering gold, the SPDR Gold Shares ETF (GLD) stands out. With $56.7 billion in assets under management, a 0.40% expense ratio, and a commendable 10% 5-year return as of October 31, 2023 (per Investopedia), it merits consideration.

2. Commodities

Grains and pulses| Pexels | Photo by Viktor Smith

Commodities, ranging from grains and precious metals to oil and natural gas, share a unique relationship with inflation, often signaling its onset. As a commodity's price ascends, so does the cost of goods derived from it. Investing in this asset class is feasible through exchange-traded funds (ETFs), with the iShares S&P GSCI Commodity-Indexed Trust (GSG) standing out as a worthy consideration. External factors like geopolitical tensions can swiftly impact supply and demand dynamics, influencing commodity prices. The iShares S&P GSCI Commodity-Indexed Trust, with a 0.75% expense ratio and a 5-year return of 4.88%, exemplifies this market segment.

3. A 60/40 Stock/Bond Portfolio

Stocks | Pexels | Photo by energepic.com

A 60/40 stock/bond portfolio like the Dimensional DFA Global Allocation 60/40 Portfolio (I) (DGSIX) is a secure and traditional blend for conservative investors. With assets under management at $3.6 billion, an expense ratio of 0.24%, and a 5-year return of 5.60%, it offers a straightforward investment strategy. While it serves as a hedge against inflation, providing a safer investment avenue, it's crucial to note its potential underperformance compared to an all-equity portfolio, particularly over extended periods due to the compounding effects. Balancing safety and returns, it remains a viable choice for those seeking stability in their investment portfolio.

4. Real Estate Investment Trusts (REITs)

Income-generating property (representational image) | Pexels | Photo by PhotoMIX Company

Real Estate Investment Trusts (REITs) are like gatekeepers to the world of real estate, owning and managing income-generating properties. As inflation swells, property values and rental income typically ascend, making REITs an attractive hedge. The Vanguard Real Estate ETF (VNQ) stands out, offering broad real estate exposure with a modest expense ratio of 0.12% and a 5-year return of 2.27% as of October 31, 2023. However, REITs have their caveats, including vulnerability to the allure of high-yield assets when interest rates climb.

5. The S&P 500

Investing in the S&P 500, comprising the 500 largest U.S. public companies, can be a wise move for long-term gains. The index is currently buoyed by a substantial 35% representation from technology and communication services, sectors known for being less capital-intensive and potentially thriving in inflationary periods. The S&P 500 Index's weightage to high-cap companies means their stock prices wield significant influence while the absence of small-cap exposure limits potential returns historically associated with these agile entities.

6. Real estate income

As inflation drives up property values, landlords can charge higher rents, resulting in increased rental income over time. To explore this avenue, the VanEck Vectors Mortgage REIT Income ETF (MORT) provides exposure to real estate income. While real estate offers potential returns, it comes with higher transaction costs, limited liquidity, management responsibilities, and legal obligations.

7. Leveraged Loans

Leveraged loans are loans given to companies already burdened with high debt or a low credit score, carrying heightened default risks and increased costs for borrowers. Grouped as collateralized loan obligations (CLOs), these loans pool multiple debts into a single security, providing investors with scheduled debt payments. CLOs, with a floating rate yield, emerge as a potential hedge against inflation. For those considering this avenue, the Invesco Senior Loan ETF (BKLN) is worth exploring, boasting a $5.1 billion asset under management, a 0.66% expense ratio, and a 2.98% 5-year return as of October 31, 2023. But, leveraged loans entail trade-offs, presenting risks like credit default, liquidity concerns, and fewer protections. Businesses borrowing leveraged loans may face closure or an inability to meet financial obligations while the illiquidity of these loans compared to publicly traded securities poses challenges.

8. Treasury inflation-protected securities (TIPS)

Treasury bonds (representational image) | Pexels | Photo by David Bartus

Treasury inflation-protected securities (TIPS) available in 5, 10, and 30-year maturities, adjust their principal based on inflation rates, ensuring investor protection. For those preferring exchange-traded funds (ETFs), options like iShares TIPS Bond (TIP), Schwab U.S. TIPS (SCHP), and FlexShares iBoxx 3-Year Target Duration TIPS Index (TDTT) provide accessible pathways. As of November 24, 2023, iShares TIPS Bond ETF boasts $19.5 billion in assets under management, with an expense ratio of 0.19% and a 5-year return of 2.08%.