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Inflation ETF Portfolio

Opportunities During Times of High Inflation

Why Invest in an Inflation ETF Portfolio?

An Inflation ETF portfolio could be a potential inflation protection strategy. In 2022, global inflation accelerated for the first time in 30 years following loose pandemic-era monetary policies, geopolitical turmoil and rising energy prices. Catching everyone by surprise, it put pressure on households and investors. However, an Inflation ETF could help to safeguard your spending power and the value of your investments. Various asset classes could help achieve this goal, but it is also possible to combine several equity  ETFs that historically responded well to inflationary pressures.

  • An inflationary environment inevitably leads to a decline in the purchasing power of consumers
  • Investors can turn to financial markets as a protective measure from inflationary pressures such as a decline in real income
  • Certain asset classes, including inflation-protected bonds, commodities, and certain equity sectors, could all benefit an Inflation ETF Portfolio
  • Inflation is a general increase in the prices of goods and services in an economy
  • The common measure of inflation is the inflation rate, the year-on-year change in a general price index
  • Inflation can also be measured by the Consumer Price Index (CPI)
  • Changes in measured CPI track changes in price over time

Inflation is on the Rise in Europe

Euro Area Consumer Price Index, %

Source: European Central Bank. Data for the period 31/05/2003 – 30/04/2023.

Looking at Various Asset Classes

When prices rise rapidly, many investors realize that keeping money in a current account generating little to no interest is similar to simply giving away part of their savings. In many cases, investing those savings, for instance via an Inflation ETF,  might sound like a viable solution. With so many options on the market, it is necessary to understand the historical behavior of various asset classes and associated risks.

Fixed income is typically viewed as a safe haven when talking about investment strategies, but this might not be the case in inflationary times. Bonds are less likely to give any protection when prices rise, as central banks usually respond to high inflation by hiking interest rates1. On top of that, the expected payout at the end of a bond’s life is fixed and won’t be adjusted no matter how high inflation gets.

1 Source: NBER,

Investing in equities has been a better hedge against inflation. Equities have historically performed well in times of moderate and stable inflation as good management can often raise prices, leading to higher revenues. This has tended to be true of companies with pricing power – in other words, those with a sufficiently robust competitive position to raise prices.

Rent increases have typically risen at the same time as consumer prices, although there may be a time lag. On the other hand, rising interest rates can reduce property values, which would affect short-term investors. Yet hedging against inflation through buying real estate directly brings a high barrier of entry, as well as the complications of low liquidity. A simpler way to get exposure is through the stocks of listed real estate companies.

Commodities can fulfill their role in inflation hedging in two ways. First of all, their intrinsic value rises when prices for consumer goods rise. They also react faster to unexpected inflation than many other asset classes. Yet, secondly, their return is less correlated with broad equity or bond markets and can diversify a portfolio. It is important to mention that investing in commodities via derivatives is difficult for ordinary investors – it’s more straightforward to buy shares in commodity producers, for example, mining companies or oil services as a proxy. An Inflation ETF focused on commodity producers can be an attractive choice for low-cost diversification.


Potential Components of an Inflation ETF Portfolio

Investors can get exposure to stocks with the potential to protect against inflation through an Inflation ETF. Whether because of companies being able to raise prices, value adjustments, or commodities’ safe haven qualities, the Dividend ETF, Real Estate ETF and Commodity ETF have previously proved their worth in times of rising prices. Even though investing in equities is risky and history is an imperfect guide to the future, investors might consider them for a portfolio of Inflation ETFs.

Allocation of an Inflation ETF Portfolio

No two inflationary cycles are the same. That means different types of assets are most successful for protecting against inflation in each cycle. As a result, investors may be better off investing across several different portfolios to diversify the risks.

Potential Inflation ETF Portfolio Allocation

Source: VanEck.

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