Whether you’re paying more for gas or groceries, prices for essentials are increasing, and everyone's feeling the squeeze. That’s inflation.
"Simply put, inflation is an increase in prices for goods and services which corresponds with a decline in consumer purchasing power," explained Ashley Tran, Fidelity assistant branch manager in Tampa, Florida.
If you want to continue with investing to ride out the storm, exchange-traded funds, or ETFs, can be a wise investment pick.
How does inflation affect the global markets?
While inflation in the U.S. hit a 40-year high in May, Tran said it’s not the only country that has seen rising costs. Increasing gas and food prices following Russia’s invasion of Ukraine have elevated inflation across the globe, she noted.
"International investors face a number of financial risks during times of inflation," Tran added.
ETFs are baskets of securities that trade like stocks on an exchange.
"They provide investors access to underlying investments, like stocks or bonds, and generally provide more diversification than a single stock or bond," said Tran.
Why are ETFs wise if inflation is rising?
During times of market instability and rising inflation, Tran noted, ETFs are a smart choice to consider to diversify a portfolio.
"It’s also important to remember your long-term savings strategy, especially during times of inflation and market instability, to help your investments grow over time," she said.
Do ETFs factor in inflation, and are they less risky?
As ETFs track a particular sector or index, there are ETF options that hedge against inflation.
"Overall, ETFs are a great option, especially when compared to leaving your money in a traditional savings account, as a diversified asset mix will help your investments grow over time," added Tran.
Do ETFs offer investors less risk?
ETFs help diversify an investment portfolio, Tran said, which lowers one's risk level and also builds a well-balanced strategic asset allocation of stocks and bonds. She added that ETFs are good investment vehicles to consider during rising inflation and market volatility.
What to consider regarding ETFs and inflation
Todd Rosenbluth, head of research with VettaFi, says commodities-focused ETFs are particularly useful during inflationary times.
"The price of gold, energy and agricultural products tends to rise during periods of high inflation, and ETFs offer easy, low-cost access," he said.
|GLDM||WORLD GOLD TRUST SPDR GOLD MINISHARES TR(R/S||40.20||-0.87||-2.12%|
|PDBC||INVESCO ACT MANAGE EXCH TR CMDTY FD OPTIMUM YIELD DIVERSIFIED C||14.17||-0.08||-0.56%|
|PPI||INVESTMENT MANAGERS SERIES TR II AXS ASTORIA INFLT SENSITIVE||26.13||-0.19||-0.73%|
|INFL||LISTED FUND TRUST HORIZON KINETICS INFLATION||30.61||-0.37||-1.19%|
Rosenbluth added that ETFs like SPDR Gold MiniShares and Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF are a couple of examples.
In addition, he says there are more diversified ETFs like AXS Astoria Inflation Sensitive ETF and Horizon Kinetics Inflation Beneficiaries ETF.
"These ETFs are actively managed and offer exposure to equities that can do well in inflationary times," Rosenbluth added.