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5 Investments to Hedge Against Inflation

Toni Nasr, CFA, FRM| Updated: August 3, 2022

Over the last year, inflation was the main concern for investors and policymakers after reaching historically high levels. This uncertain and volatile environment makes investing challenging as investors struggle to find suitable investments that are not largely affected by rising inflation.

In this article, we’ll look at five investment options that could be a good place to start when hedging against inflation.

1# Treasury Inflation-Protected Securities (TIPS)

TIPS are one of the best options for investors during a period of rising inflation. Those securities are indexed to inflation. In other words, those bonds are designed so that their principal and coupon payments rise in tandem with inflation.

You can add TIPS to your portfolio by:

  • Directly buying it from the US government at TreasuryDirect.gov,
  • Checking with your brokerage firm if it offers TIPS bonds,
  • Buying a TIPS mutual fund or exchange-traded funds (ETF) via an online broker.

2# Commodities

Commodities (including precious metals, grains, sugar, and natural gas) are a major source of inflation, and their price movement is an indicator of the upcoming inflation rate. It is possible to invest in exchange-traded funds (ETFs) that track a basket of commodities.

You can add commodities to your portfolio by buying:

  • The physical commodity  
  • Futures contracts through an online broker,
  • A mutual fund or exchange-traded fund (ETF) that invests in a basket of commodities (via an online broker).

3# Gold

Gold was always considered a hedge against inflation. Although it does not pay any dividends, the value of gold during inflation periods tends to increase. Here too, investors can invest in gold physically or via an ETF that tracks the performance of gold.

Similar to other commodities, you can add gold to your portfolio by buying:

  • Physical gold (coins),
  • Futures gold contracts through an online broker,
  • A mutual fund or exchange-traded fund (ETF) that invests in gold physically or tracks the price of gold (via an online broker).

4# Consumer Staples industry

The Consumer Staples sector includes companies that are less sensitive to economic cycles (for example, companies like food and drink makers). These companies can easily pass on inflation costs to consumers without putting pressure on their profitability margins.

You can add stocks or ETFs to your portfolio through buying:

  • A stock after checking the companies available with your online broker,
  • An exchange-traded fund (ETF) that tracks the consumer staples industry.

5# Real Estate

Real estate is another choice for investors to store value during inflation while being able to generate rental income. Property values and rental income tend to keep pace with inflation over time, and real estate investments tend to thrive during inflationary periods.

Investors can add real estate exposure to their portfolios by:

  • Directly buying real estate if they have enough money,
  • Investing in Real Estate Investment Trusts (REITs) or exchange-traded funds (ETFs) that invest in real estate companies (via an online broker),
  • Real Estate Crowdfunding platforms, which involve pooling investors’ money to fund a real estate project.

What is inflation?

Inflation is simply the rise in the prices of goods and services in a specific economy. When the price level rises, each unit of the currency will purchase fewer products; hence, inflation is the loss of money’s purchasing power over time. In simple terms, your dollar today won’t buy as much as it did last year or two years ago.

The bottom line

When it comes to investing during inflation, certain asset classes may be inflation-proof, but profits can never be guaranteed. Nonetheless, any one or a mix of the above-mentioned asset classes could help your portfolio withstand, and even grow, during this period of rampant inflation.

Did we help in getting a better understanding on how to hedge against inflation? If not, please let us know your feedback in the comments below. 

Toni Nasr, CFA, FRM
Fintech Analyst

Toni is a Fintech Analyst with over 8 years of experience in the financial industry where he worked as a financial control analyst at a regional bank and later conducted independent investment research analysis.

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