Case Study: Hedging Inflation

Case Summary

Max and Erma are well on their towards saving for retirement with a well-diversified portfolio.  Although they have taken a hit in the recent bear market, they still have a substantial nest egg and want to protect their investments against any inflation threats that may arise from the massive monetary and fiscal stimulus actions taken by the U.S. and other large economies.


Investors seeking to protect against inflation with ETFs have the choice of traditional hedging tools such as gold and other commodities or they can choose from newer fixed income products that are specifically designed to keep pace with inflation.

Commodity ETFs, and specifically Gold ETFs, provide vehicles for investing directly in physical gold or gold futures contracts.  Diversified Commodity ETFs enable the investor to gain exposure across all major commodity categories.

Equity ETFs that specialize in mining stocks are another way to gain exposure to commodity price levels.

Fixed income ETFs that invest in inflation fighting bonds called Treasury Inflation Protected Securities or TIPS are available in both domestic and international categories.

Another way to protect against inflation is to invest with companies that are almost guaranteed to be able to pass on price increases.  Sector ETFs and Sub-Sector ETFs provide exposure to fixed-margin industries such as utilities and defense contractors.

Portfolio Recommendations

Max and Erma should consider investing in SPDR Gold Shares (GLD). With $30 billion in assets, the world’s largest gold ETF buys and stores physical gold and carries a low expense ratio of 0.40%. If the couple has a higher risk tolerance, then the Market Vectors Gold Miners ETF (GDX) is a way to gain exposure to gold while also taking an equity stake in large mining companies such as Barrick GoldGoldCorp and Newmont Mining.

For broad-based exposure to commodities, Max and Erma should look at the DB Commodity Index Tracking Fund (DBC).  The $1.3 billion fund invests in futures contracts on six of the most heavily-traded and important physical commodities in the world – crude oilheating oilgoldaluminumcorn and wheat.

The iShares Barclays Treasury Inflation Protected Securities Bond Fund (TIP) tracks an index that includes all publicly issued, U.S. Treasury inflation-protected securities that have at least 1 year remaining to maturity, are rated investment grade and have $250 million or more of outstanding face value.  For international inflation-protected securities, the couple should consider the SPDR DB International Government Inflation-Protected Bond ETF (WIP).

Finally, the couple can also consider the Utilities Select Sector SPDR Fund (XLU)which owns electric utilitiesgas utilitiesmulti-utilities and independent power producers & energy traders.  For exposure to defense contractors, Dow Jones U.S. Aerospace & Defense Index Fund (ITA) invests in Aerospace companies as well as producers of components and equipment for the Defense industry, such as military aircraft, radar equipment and weapons.