A Few ETF Ideas on How to Protect Our Investments from Strengthening Inflationary Trens

U.S. October Consumer Price Index added 0.9% vs. +0.5% consensus and +0.4% prior, that resulted in a +6.2% YoY vs. +5.8% consensus and +5.4% prior number. The increase was broad-based, with indexes rising for energy, shelter, food, used cars and trucks, and new vehicles. Core CPI came in at +0.6% vs. +0.4% consensus and +0.2% prior. Most components of the core index advanced on the month — accommodations and storages, used cars and trucks, as well as new vehicles, medical care, household furnishings and renovations, and recreation – all contributed. The food index increased 5.3%. Fast food prices soared 7.1% in October from the year-ago month, representing the largest increase on record due to higher costs for beef and other foods as well as rapidly rising labor costs. Data for airline tickets and beverages were among the few to decline over the month.

The core inflation, which strips out volatile components such as food and energy prices, rose 4.6% YoY in October posting the greatest annual increase since August 1991 – and 0.6% from the year-ago month. Energy costs jumped a whopping 30%, with gasoline soaring nearly 50%. The question of whether they will keep rising for a while or abruptly stall remains open. Natural gas and heating oil prices are also soaring. Again, addressing this phenomenon needs a clear answer of whether the world’s power generation returns to its classics, or what we see is just a transitory issue.

The trend is likely to continue in the coming months given the huge infrastructure and stimulus packages, wider reach of free vaccinations and an increasingly income-indexation demanding job market. OECD now predicts more prolonged elevated inflation in 2022 than estimated before.

Japan’s data also showed the nation's export price index grew by 2.1% on a yen basis from September to October arriving at an annual increase of 13.7%, while the yen-nominated import prices soared 4.1% from last month's number and surged by a whopping 38% compared to October 2020.

Amid the inflationary backdrop, investing in TIPS ETFs, which may be viewed as a sort of protection against rising inflation, makes sense. There are several options in the space to tap rising consumer prices. Among them, iShares TIPS Bond ETF (TIP), Schwab U.S. TIPS ETF (SCHP), Vanguard Short-Term Inflation-Protected Securities ETF (VTIP), iShares 0-5 Year TIPS Bond ETF (STIP) and Quadratic Interest Rate Volatility and Inflation Hedge ETF (IVOL) are the five most popular that could be compelling investments.

iShares TIPS Bond ETF is the most popular choice in the TIPS space with AUM (assets under management) of $36.9 billion and an average daily volume of 3.8 million shares. TIP tracks the Bloomberg Barclays U.S. Treasury Inflation-Protected Securities Index (Series-L), holding 49 securities in its portfolio. The fund has an effective duration of 7.76 years and an average maturity of 8.20 years.