How to Play the Inflation Threat

It's time to think about how you're going to hedge the rising prices, because many signs are pointing to the fact that inflation is a very real threat.

The dollar is at lows not seen since last year, which has made it more affordable for markets outside the United States to buy commodities denominated in U.S. dollars (especially oil). More money may be coming off the printer, which could erode the dollar. The Federal Reserve may not hike interest rates, since it would slow down the U.S. recovery efforts.

There are a number of ways you can hedge the threat of inflation, including these three:

• Commodities. It's now easier to invest in commodities and hedge against inflation. Before ETFs came along investors had to deal with tricky and pricey futures or the cumbersome act of physically holding and even storing a commodity. Right now, there’s huge access that wasn’t there just a few years ago, and there are billions now flowing into ETFs. Oil didn’t spike from $30 to $150 a barrel simply on rising demand or a drastic drop in supplies — speculation had a role. If you can’t beat ‘em, join ‘em. The speculators are a powerful force in the markets these days. Check out our report on the array of commodity ETFs available, from single commodities to total commodity market ETFs.
• Treasury Inflation-Protected Securities (TIPS), which help you maintain your purchasing power as the value of the dollar falls. They offer a fixed yield, plus the inflation rate, to keep pace with changes in the consumer price index. TIPS may be attractive, and many financial advisers recommend a permanent 15% portfolio allocation to the class, but buying these bonds at periodic Treasury auctions or in the secondary market can be a pain. An ETF made up of TIPS is easier and more cost efficient. iShares Barclays TIPS Bond (NYSE: TIP) is one easy way.
• Foreign Currencies. As the dollar weakens relative to other currencies, it can be advantageous to have a portion of your investments in them. One of the easiest ways is to invest in an ETF that holds these currencies. These days, there are currency ETFs for the euro, British pound, Brazilian real, Japanese yen, the Indian rupee and much, much more.

 |  |