How to hedge against inflation: 9 Assets for Protection Against Inflation and the ETFs that Track Them

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An example of a stock/bond portfolio is the Dimensional DFA Global Allocation 60/40 Portfolio . Although certain investments may seem to provide a decent return, they can be sold at a loss when inflation is factored in. First, it is weighted toward the companies and agencies that have the most debt. In addition, it is heavily weighted toward U.S. government exposure, so it is not necessarily well-diversified across sectors of the bond market. Before investing in commodities, investors should be aware that they are highly volatile and investor caution is advised in commodity trading.

Sustained high inflation would likely lead to meaningfully higher interest rates, so investors should consider how to best position their portfolios if it does stick around. That said, the economy spent much of the 2010s without high sustained inflation despite huge budget deficits and low interest rates. Bankrate follows a stricteditorial policy, so you can trust that our content is honest and accurate. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. The content created by our editorial staff is objective, factual, and not influenced by our advertisers.

How to Hedge Against (or Profit From) Inflation

To hedge against inflation, investors can choose from many different investment options. This creates a situation where the currency seller can’t turn around and sell the foreign currency at a higher price. By hedging against the loss of currency value, forward contracts are an excellent option for investors worried about currency risk. The buyer pays the seller for the foreign currency and then holds it, effectively locking its value.

Inflation is a natural occurrence in an economy, but inflation hedging can be used to offset the anticipated drop in a currency’s price, thus protecting the decreased purchasing power. Creating a diversified portfolio of stocks from other countries can protect investors from the declining purchasing power of money in the US market. Traditionally, investments such as gold and real estate are preferred as a good hedge against inflation. However, some investors still prefer investing in stocks with the hope of offsetting inflation in the long term.


Investors often view gold as a store of value during tough economic times, and it has succeeded in this purpose over long periods. Treasury inflation-protected securities are bonds issued by the Treasury that are indexed to inflation. This means they inherently provide protection against inflation, making them a good option when the economy is heating up. Unlike fixed income stocks, growth stocks tend not to perform as well during periods of inflation. These are companies that often have little to no cash flow in the present but expect that cash flow to grow significantly—in other words, their value is tied to future earnings. Some insurance policies have a feature called insurance inflation protection, which stipulates that future or ongoing benefits to be paid are adjusted upward with inflation.

best investments that hedge against inflation, and others to avoid

As inflation rates rise, TIPS adjust in price to maintain their value. They are a low-risk option that earn interest and are protected against inflation. They have an annual interest rate based on a fixed rate and a semiannual variable rate based on inflation. Series I bonds issued between May and October 2022 have a rate of 9.62%. Even the best high-yield savings accounts’ annual percentage yield won’t match the inflation rate. According to the FDIC, the average savings account APY was 0.37% as of March 20, based on the latest data available.

Keep in mind, though, that there may be a substantial time lag until the value of loans increases as the rates rise. An example fund of this type is the Lord Abbett Floating Rate Fund . A certificate of deposit is a short- to medium-term deposit in a financial institution at a specific fixed interest rate.

TIPS bonds pay interest every six months, and they’re issued in maturities of 5, 10 and 30 years. Because they’re backed by the U.S. federal government , they’re considered among the safest investments in the world. Here are some top inflation hedges that may help you mitigate the impact of inflation.

investment options

At the point in time when the forward contract expires, the buyer and seller of the forward contract engage in a currency trade or, more commonly, the buyer can request delivery of the currency. But incurring it can also be a good financial move when inflation is rampant. Because they’re backed by the US government, TIPs are highly safe, and a good choice for conservative investors. All of our content is authored by highly qualified professionals and edited by subject matter experts, who ensure everything we publish is objective, accurate and trustworthy. Bankrate principal writer James F. Royal, Ph.D., covers investing and wealth management.

What is Inflation Hedge?

The pandemic caused tremendous demand for goods and labour, leading to inflation. This made investment returns less attractive, and over time, it significantly eroded the value of investments. One way to buy these is through ETFs or mutual funds, which typically own a wide assortment of such bonds. So in addition to inflation protection, you’ll also get some diversification, meaning your portfolio may benefit from lower risk.

Selita notes that inflation makes it cheaper to service — that is, pay — some types of debt, as long as it has a fixed interest rate. In the same way that inflation eats away at the value of your cash, it also eats away at the value of your loan. This benefits individuals that have acquired loans or mortgages in the past, before the period of inflation set in. Rising prices can mean more profit for companies, which in turn boosts share prices. No guarantees, of course, but over the long term, the stock market has historically provided returns that beat inflation. Over time, inflation can erode the purchasing power of your dollar, and also chip away at your investment returns.

If inflation reappears, investments in stock will enjoy an advantage while the bond market will suffer since it earns a fixed income all throughout. Stocks hedge against inflation in two main ways, i.e., stocks pay a dividend, and they grow over time. As companies grow their net revenues, they also increase the dividends distributed to shareholders, which assures investors higher cash flows in the future.

These are complex investment options, so speak with an investment professional before making any decisions. Choose an investment strategy that’s likely to give you a return that at least keeps up with the inflation rate. Look for assets that appreciate, that have a fundamental value of their own, or that pay interest at a fluctuating rate.

When inflation goes up, there’s a correlation of 0.45 (out of 1.00) that short-term TIPS will move in the same direction. Inflation hedging is a way for investors to protect against the potential loss of value in foreign currency. Although the price of most commodities and currencies has risen over the past few years, the best investment in inflation hedging happened during the early 1980s.

Like any other exchange-traded product, the price of currency ETFs can vary based on the current market. On the surface, foreign currency funds may look very similar to traditional equity funds. Williams notes that those with low-interest bank accounts effectively lose money during periods of inflation because the interest they pay is eaten up by the decline in value. Indeed, any investment that generates a fixed rate of return or interest will see diminished returns in real dollars during inflation. If you expect inflation to persist, it can actually be a good time to be a borrower, if you can avoid being directly exposed to that inflation. If you borrow at a fixed interest rate, you’re effectively repaying your debt with cheaper dollars in the future.

You can also use debt to deal with inflation

Instead, investors can only estimate the value based on current market values. Inflation hedging also doesn’t give investors exposure to foreign markets. While foreign currency funds can invest in foreign companies, inflation hedges don’t offer any exposure to foreign assets. Inflation hedging gives investors a way to protect against the loss of value in foreign currency, but it isn’t the best investment strategy.

When inflation occurs, the government will take action to manage the market volatility, but the prices of goods and services will continue to rise. For example, an investor may acquire an investment with an annual return of 5%. However, at the end of the year, when the investor plans to sell the investment, the inflation rate accelerates to 6%. It means that the investor will suffer a loss of 1%, which is a loss in their buying power.

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