3 ETFs To Profit From Deflation

While the overall market tumbled and sold off, a few stocks and ETFs stood to benefit. One way to profit from this trend is betting on bear markets; another one, to place a wage on deflation and this is what this article will suggest.

Finding Income Amid Global Price Plunges

Falling prices are not necessarily good news, although consumers would think so at first. Investors, however, do recognize the risks involved in deflation. For instance, a long-term fall in financial assets would lead to vicious cycle where businesses and consumers drive prices lower consistently. Some believe this could even lead to a destruction of demand.

In fact, people at Motif Investing remind that, Japan witnessed such an occurrence in the early 1990s and every bump in the global economic recovery stokes similar fears in investors.

In this environment, some investors have sought longer-term bonds and related ETFs to lock in a fixed interest rate while stabilizing the relative risk of re-investment. If demand for long-term bonds increases with higher deflationary expectations, so may the prices of long-term bonds and related ETFs.

Thus, Motif Investing, which constantly looks for trends, ideas and world events that could create an investment opportunity, and then picks 10 to 30 related stocks to build portfolios around, weighing them based on their exposure to the coinciding idea, event or trend, created a portfolio that provides exposure to ETFs with long-duration US Treasury, municipal and investment-grade corporate bonds.

Allocation & Performance

The Deflation motif allocates its assets to three segments: US Treasuries (49.7 percent of assets), US Corporate ETFs (26.5 percent) and US Municipal ETFs (23.9 percent). With this strategy, it has managed to outperform the US Bond Index (AGG) both over the past year and past month, delivering growth of 3.2 percent and 0.9 percent, respectively.

The three ETFs comprised in the portfolio (and the percentage of assets allocated to each) are:

  • Vanguard Extended Duration ETF (NYSE:EDV), 49.7 percent
  • Vanguard Long Term Corporate Bond ETF (NASDAQ:VCLT), 26.5 percent
  • PowerShares National AMT-Free Municipal Bond Portfolio (NYSE:PZA), 23.9 percent

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