Exploring Inflation-Resistant Funds.
March's Consumer Price Index (CPI) surprised by rising for the third straight month, dashing hopes of an interest rate cut.
With the bond market bracing for higher long-term rates, futures push back expectations for the next rate cut to June-September.
Amid this inflation backdrop, let's revisit the best ETFs for 2024.
What's Driving Inflation in 2024?
Inflation, the increase in goods and services prices over time, is influenced by various factors:
Persistent Pandemic Effects: Supply chain disruptions from pandemic closures and logistical bottlenecks continue, limiting goods supply and driving up prices.
Ukraine Conflict: Ongoing war disrupts global energy and commodity markets, raising prices for oil, gas, wheat, and more, which are then passed on to consumers.
Monetary Policies: Loose monetary policies like quantitative easing during the pandemic may still affect inflation, despite some central banks raising rates.
Wage Pressures: Labor shortages in some sectors lead to higher wages, boosting production costs for businesses and eventually consumer prices.
How Does Inflation Affect Investments?
High inflation can lead to price declines for many stocks and bonds. However, certain assets, like commodities and inflation-hedging securities, may outperform during inflation spikes.
Stocks: High inflation may temporarily hurt stocks as higher interest rates raise borrowing costs, affecting corporate profits, especially for growth stocks.
Bonds: Most fixed-income securities perform poorly in high inflation, especially long-term bonds and ETFs.
Best ETFs to Hedge Against Inflation:
TIPS ETFs: These track Treasury Inflation-Protected Securities (TIPS) indexes, adjusting principal values with inflation. iShares TIPS Bond ETFis the largest.
Commodity ETFs: Designed to follow commodity price movements, they perform well when commodity prices rise. Invesco DB Commodity Index Tracking Fund (DBC) is the largest.
Dollar Currency ETFs: They don't directly hold dollars but use derivatives to profit from dollar appreciation. Invesco DB US Dollar Index Bullish Fund is popular.
Precious Metals ETFs: Gold and silver ETFs are seen as inflation hedges. SPDR Gold Trust (GLD) and iShares Silver Trust are top choices.
Conclusion:
Some ETFs tend to outperform during high inflation, including TIPS, commodity, dollar currency, and precious metals ETFs. However, these funds don't guarantee returns, so diversification and a long-term perspective are key to managing inflation risks.
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