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Another ETF Avenue For Fighting Inflation

October 19, 2016 8:18 am
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Treasury Inflation Protected Securities, or TIPS, and the corresponding exchange-traded funds have been a hot asset class this year. Inflation is an increasingly important topic for the Federal Reserve, and investors have been pouring billions of dollars into fixed income exchange-traded funds.

Inflation, Treasuries And TIP

The rub for investors with hedging against inflation via ETFs is these funds are not great income generators. For example, the real yield on the iShares Barclays TIPS Bond Fund (ETF) (NYSE: TIP) is just 0.08 percent, according to issuer data. Real yield is an investment's returns adjusted for inflation.

While TIPS and ETFs like TIP are obviously part of the inflation-fighting solution, they are not the only tools investors should have in their portfolios to combat rising consumer costs.

Other Strategies

Recent inflationary trends “which will impact consumer spending, underscore why a portfolio hedged against inflation should include more than TIPS. While TIPS protect Treasuries against inflation, Treasuries rarely comprise an investor's entire portfolio and TIPS are still impacted by the shape of the yield curve and interest rate policy,” said State Street Global Advisors in a recent note.

Related Link: Finding Value With Technology ETFs

Real assets should also be considered part of the inflation-fighting solution and that theme can be accessed with multiple ETFs, including the SPDR S&P North American Natural Resources ETF (NYSE: NANR). NANR debuted 10 months ago and has more than $796 million in assets under management, easily making it one of the most successful ETFs to debut last year.

“NANR is designed to meet demand for natural resources equity exposure by providing access to companies in the energy, materials and agriculture industries. NANR provides investors with an approach that weights the sub-sectors of the portfolio 45 percent energy, 35 percent materials and 20 percent agriculture stocks,” according to a statement from State Street Global Advisors (SSgA).

The SPDR S&P North American Natural Resources ETF follows the S&P BMI North American Natural Resources Index, which is a subset of the S&P Global Large MidCap Commodity and Natural Resources Index, according to SSgA.

NANR allocates over 94 percent of its combined weight to energy and materials stocks, two of this year's best-performing sectors. As a way to hedge against inflation, NANR has merit.

“Global Natural Resource Stocks represent ownership in manufacturers and distributors of natural resources such as oil and gas, energy equipment and services, metal and mining, and paper and forest products. When global demand for natural resources grows, the increase in the underlying commodity prices historically generates higher profits for these companies and potentially translates into higher returns for investors,” added State Street.

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