High inflation and the markets: why ETFs can be a good investment

Whether you’re paying more for gas or groceries, the prices of essential items are rising and everyone is feeling the pressure. That is inflation.

“Simply put, inflation is an increase in the prices of goods and services that corresponds to a decrease in the purchasing power of the consumer,” explained Ashley Tran, assistant manager of the Fidelity branch in Tampa, Florida.

If you want to continue investing to weather the storm, exchange-traded funds, or ETFs, can be a wise investment choice.

How does inflation affect global markets?

While inflation in the US hit a 40-year high in May, Tran said it’s not the only country to see cost increases. Rising gasoline and food prices following Russia’s invasion of Ukraine have pushed up inflation around the world, he noted.

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Traders on the New York Wall Street Stock Exchange

Traders work on the trading floor of the New York Stock Exchange in Manhattan, New York City, on August 2, 2022. (Reuters/Andrew Kelly)

“International investors face a number of financial risks in times of inflation,” Tran added.

Why ETFs?

ETFs are baskets of securities that trade like stocks on an exchange.

“They give investors access to underlying investments, such as stocks or bonds, and generally provide more diversification than a single stock or bond,” Tran said.

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Why are ETFs wise if inflation is rising?

During times of market instability and rising inflation, Tran noted, ETFs are a smart option to consider for diversifying a portfolio.

exchange traded fund

ETF stands for Exchange Traded Fund. (iStock Illustration / iStock)

“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,” he said.

Do ETFs take inflation into account and are they less risky?

Since ETFs track a particular sector or index, there are ETF options that are hedged against inflation.

“Overall, ETFs are a great option, especially when compared to leaving your money in a traditional savings account, as a mix of diversified assets will help your investments grow over time,” Tran added.

WHY ETFS ARE A GOOD INVESTMENT VALUE

food price inflation

People shop for frozen food at a store in Rosemead, California, on June 28, 2022. (Frederic J. Brown/AFP via Getty Images/Getty Images)

Do ETFs Offer Less Risk to Investors?

ETFs help diversify an investment portfolio, Tran said, reducing the level of risk and also creating a well-balanced strategic asset allocation of stocks and bonds. He added that ETFs are good investment vehicles to consider during rising inflation and market volatility.

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What to consider regarding ETFs and inflation

Todd Rosenbluth, head of research at VettaFi, says Commodity-focused ETFs they are particularly useful in times of inflation.

“The price of gold, energy and agricultural products tend to rise during periods of high inflation and ETFs offer low-cost and easy access,” he said.

Heart Security Latest Change Change %
GLDM WORLD GOLD TRUST SPDR GOLD MINI-STOCK TRUST 34.97 -0.20 -0.58%
PDBC INVESCO ACT MANAGE EXCH TR CMDTY FD DIVERSIFIED OPTIMAL YIELD C 17.16 -0.09 -0.52%
IPP INVESTMENT MANAGER SERIES TR II AXS ASTORIA INFLT SENSITIVE 24.73 -0.32 -1.28%
INFL HORIZON KINETICS INFLATION TRADED TRUST FUND 30.60 -0.32 -1.03%

Rosenbluth added that ETFs like SPDR Gold MiniShares and Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF are a couple of examples.

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Also, 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 stocks that can do well in times of inflation,” Rosenbluth added.

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