A Few Alternatives for Dealing with Inflation Risk

As global economies start to show signs of recovery, the US dollar remains relatively weak and our government continues to spend at record levels, inflationary worries have become the new talk of the town.

Although price hikes have remained relatively low, stirring up an equally disturbing notion of deflation, eventually we will have to pay the price for spending our way out of the worst recession seen in the past 50 years.  The Federal Reserve has forecasted rising prices in the range of 2% to 3%, but most experts think it will be much higher and may even flirt with double digits.  So what do you do when inflation hits?  Some common plays include looking into precious metals and commodities.  An equally important move could be the utilization of fixed income.

Here are a few possible plays to deal with inflation:

Gold:  The most well-known and grandfather hedge against inflation, the SPDR Gold Shares (GLD). 

Fixed Income:  The iShares Barclays TIPs Bond (TIP).  This is an ETF that invests in inflation-protected securities and adjusts its coupon payments and underlying principal to compensate for inflation as measured by the consumer price index.

Commodities:  For commodities exposure its worth considering three alternatives, one providing exposure through commodities futures and two through equities of commodity-producing companies.

In the first, the Powershares DB Commodity Index Fund (DBC) provides exposure via futures to refined and unrefined oil, precious and base metals, and wheat and corn.  GSG, another futures-based commodity ETF halted creation of new shares on August 24 in response to potential CFTC changes in policy regarding position limits.

On the equities front, the iShares S&P North America Natural Resources ETF (IGE) is the established player with plenty of traction with $1.4 billion in assets.  The CRB Global Commodities Equity Index Fund (CRBQ), meanwhile, just began trading on 9/21.  The primary point of differentiation between the two is the manner of component weightings.  Matt Hougan of Index Universe reported that IGE holdings are market-cap weighted whereas CRBQ holdings are weighted according to value of commodity production, with commodity bias weighted according to total global value of each segment’s production.