The Federal Open Market Committee ended 2024 with its third straight cut in the overnight borrowing rate, while Chairman Jerome Powell signaled that the pace of interest rate cuts is likely to slow in the next year or more. Although the Federal Reserve has cut interest rates several times in recent months amid strong economic growth and easing inflation, there is widespread uncertainty about how those two metrics will turn out heading into the new year.
Inflation has proven particularly stubborn, remaining above the Fed’s target of 2%, the rate the bank recently set. It raised its core inflation forecast for 2024 to 2.8%.. To further complicate matters, the incoming Trump administration has called for a number of potentially inflationary policies, including broad tariffs and mass deportations.
For investors looking to build their portfolios for the new year, this environment becomes difficult to navigate. Investors who take a more cautious approach may want to position their investments as a hedge against inflation. Fortunately, there are a number of exchange-traded funds (ETFs) that can serve as good bets in the face of an inflationary environment. These funds are easy to access, require little oversight on the part of the investor, and explore a variety of different asset classes and sources.
Exposure to extensive anti-inflation advice
iShares TIPS Bond ETF today
iShares Tips Bond ETF
(As of 12/27/2024 at 05:30 PM ET)
- 52 week range
- $104.67
▼
$111.06
- Dividend yield
- 6.97%
- Assets under management
- $14.79 billion
Inflation-protected securities, or TIPS, are Treasury securities that are indexed for inflation so that their face value increases during periods of inflation. This makes TIPS one of the most popular government-issued securities among inflation-conscious investors.
While it is certainly possible to hedge against inflation by purchasing TIPS outright, the iShares TIPS Bond ETF NYSEARCA: Advice It goes above and beyond to make access to these bonds easier. The fund provides investors with exposure to a wide range of TIPS with many different terms for a modest fee of just 0.19%.
TIP is a low-risk fund, since all of its holdings are Treasury bonds backed by the US government, and as such it also tends to have a modest return. While there are many other TIPS-focused ETFs available, investors often prefer TIP because it has the largest asset base, highest liquidity, and most consistent of any of these funds. However, it should be noted that TIP is not a guaranteed protection against inflation – investors should monitor interest rates while investing in this fund as well.
Oil as a preventive measure
American Oil Fund Today
American Oil Fund
(As of 12/27/2024 at 05:45 PM ET)
- 52 week range
- $65.48
▼
$83.41
- Dividend yield
- 0.00%
- Assets under management
- $1.03 billion
Commodities have historically been a strong hedge against inflation. According to Goldman SachsA surprise 1% increase in inflation in the United States increased real returns on basic commodities as a broad category by 7%.
Among commodities, oil can be a particularly useful way to protect against inflation risks because energy products typically respond to supply and demand shocks, while some other commodities tend to perform better in one or other of these situations.
American Oil Fund NYSEARCA: Use It is a good balance between value and liquidity among oil ETFs. This fund has an expense ratio of 0.60% and assets under management of $1.1 billion as of December 26, 2024. Although it is not the largest or most liquid energy commodity fundLeading the way on both fronts is the American Natural Gas Fund NYSEARCA: UNGand It’s more affordable than some of its competitors (including UNG).
Investors in USO should be aware that fluctuations in oil prices often expose holders of this fund to contango, which can be problematic for long-term fund investors.
Seize the opportunity in the CLO space
Invesco Senior Loan ETF Today
Invesco Senior Loan Fund
(As of 12/27/2024 at 05:45 PM ET)
- 52 week range
- $20.61
▼
$21.25
- Dividend yield
- 5.13%
- Assets under management
- $9.29 billion
Collateralized loan obligations (CLOs) are securities consisting of tranches of high-risk debt, such as leveraged loans issued to companies that are viewed as default risk for one reason or another. These securities are attractive to investors who are cautious about inflation because they often rely on a variable rate of return. However, the level of risk to an investor is much higher than many are willing to take.
Invesco Senior Loan Fund NYSEARCA:BKLN One of the most popular ways to access the CLO space is via an ETF. By providing a broad portfolio of loans within a single ETF, BKLN may help mitigate the risks associated with default. However, BKLN is not recommended for investors who are not familiar with this high-risk area.
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