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5 Ways to Protect Your Portfolio Against Inflation

If you’ve gone shopping recently, you may have noticed some higher prices at the checkout counter. A gallon of milk that typically sold for $2 just rang up for $2.10. That summer deck project you’ve been meaning to get to? It might be getting quite expensive as lumber and wood prices have soared. Gas for driving around? Pump prices are above their 15-year averages, thanks to higher oil costs—and forget trying to rent a car!

15-year look at US inflation rate, lumber and wood product prices, retail gas price, and passenger car rental prices from 2006 to 2021

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The likely suspect causing these price increases is inflation, which represents a rise in an economy’s overall average price level. The US inflation rate recently reached 5%—a 13-year high—indicating that prices are generally rising, and the US Dollar’s purchasing power is decreasing.

It’s also important to note that inflation affects more than just prices of consumer goods—bond rates, stock prices, and potential returns on equities are all impacted too.

Inflation isn’t entirely bad, however. Higher prices can indicate economic growth, as demand for goods picks up and wages rise. Though if inflation sounds spooky—and switching to day-old milk is not the money-saving idea you had in mind—then you landed on the right blog, for it’s possible to protect your portfolio against rising prices.

Here are five popular ways to inflation-proof your portfolio:


Ex-US ETFs and Mutual Funds

Inflation is typically regarded as a negative for stocks, as it increases companies’ borrowing and production costs (materials, labor), and ultimately leads to lower expected earnings growth. If a company’s earnings are expected to shrink, ex-US investments can hedge a predominantly US portfolio, and capture potential returns from worldwide markets where inflation may not be as high.

Examples of ex-US ETFs:

Vanguard FTSE All-World ex-US ETF (VEU)

SPDR Developed World ex-US ETF (SPDW)


Examples of ex-US Mutual Funds:

Fidelity Global ex US Index (FSGGX)

Vanguard FTSE All-World ex-US Index Admiral (VFWAX)

State Street Global All Cap Equity ex-US Index (SSGVX)

As goes the theory of diversified portfolios, the less correlated two investments are to each other, the more investors will reap the benefits of diversification. This typically applies to diversifying geographically as it does to asset classes—in this case, increasing weights in positions outside of the US.


Fixed Income, including TIPS

The Federal Reserve hikes the Fed Funds rate as a means to control inflation, which increases interest rates across the board. During inflationary periods, investors might consider adding to their fixed income positions, as higher risk-free returns make bonds more attractive compared to risky assets such as equities. Treasuries are typically one of the biggest beneficiaries during rate hikes, as seen most recently in 2016:

Effective Federal Funds Rate, 1 Year Treasury Rate, 10 Year Treasury Rate, 30 Year Treasury Rate, and US Inflation Rate from 2014 through June 2021

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Another fixed-income play is Treasury Inflation Protected Securities (TIPS), which are inflation-specific. Just as treasuries fluctuate based on interest rates, TIPS principals appreciate when inflation rises—but decrease in deflationary environments, as measured by the Consumer Price Index. During inflationary periods, TIPS can provide added returns and protection to a portfolio if or when equity prices dive. TIPS are available in 5, 10, and 30 year durations.


Ex-US Currencies

Inflation not only decreases a currency’s purchasing power, but also makes it “weaker” compared to other countries’ tenders. Though a weakened currency is good for international exports, holders of that currency are at a disadvantage when purchasing from foreign nations. The US Dollar has been experiencing relative weakness from the back half of 2020 through 2021, partially due to rising inflation:

5-Year look at US Inflation Rate, GBP/USD, CAD/USD, EUR/USD, and AUD/USD from June 2016 through June 2021

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The Japanese Yen has often been regarded as a safe haven for US dollar holders in times of economic uncertainty. Japan’s historically steady economic growth and inflation rate have resulted in tame Dollar-Yen exchange rate fluctuations, providing a hedge against currency devaluation:

US GDP, US inflation rate, Japan GDP, Japan inflation rate, and JPY/USD from December 1993 through June 2021

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Those who wish to flee fiat currencies entirely might seek alternative stores of value—one gaining rapid popularity is crypto assets. Though Bitcoin has only been around for 12 years, its broad appeal as a decentralized store of value is gaining popularity. US investors can get in on the crypto craze by owning coins or buying shares in crypto trusts, such as Grayscale’s Bitcoin (GBTC), Ethereum (ETHE), and Litecoin (LTCN) trusts.

For a further dive into all things crypto, read what Onramp CEO Tyrone Ross has to say on why advisors should think about crypto assets.


Gold, Precious Metals, and Commodities

All that glitters is gold, especially during times of inflation. 

Precious metals such as gold have been historical favorites for hedging against rising prices, due to their scarcity, tangibility, and historically negative correlation to paper money.

US Inflation rate, Gold price in US Dollars, and purchasing power of the US Dollar from January 1979 through June 2021

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In addition to owning physical gold, investors can consider adding gold miners, ETFs, or even currency-hedged gold funds to their portfolios to “stay golden” through inflation. Some of these plays include SPDR Gold Shares (GLD), iShares Gold Trust (IAU), and VanEck Vectors Gold Miners ETF (GDX), Aberdeen Standard Gold ETF (SGOL),

Other tangible assets include commodities, such as oil, lumber, and steel, whose prices not only increase with inflation but also act as indicators of both future inflation and economic growth. As the economy expands, the demand for commodities heats up, pushing their prices higher.


Real Estate

Like precious metals, real estate is a tangible asset that tends to hold value when inflation is prevalent. As prices rise, so do property values and rents, increasing the amount of rental income earned along with the book value of property.

Existing homeowners may actually welcome inflation as it translates to increased home prices and owner equity; however, real estate taxes could increase in kind. If you’re considering buying a home for the first time, inflation might have you second-guessing that corner lot in the ‘burbs.

Alternatively, adding Real Estate Investment Trust (REIT) holdings to a portfolio captures some of the benefits from owning actual real estate. REITs typically operate conglomerates of real estate and are investor-owned—those investors receive distributions on the REIT’s rental income, interest, and property sales. There are hundreds of REIT equities, ETFs and Mutual Funds available on YCharts in addition to general real estate sector securities such as the SPDR Select Real Estate Sector ETF (XLRE). 


The Bottom Line

As a long, long pandemic nears its end, consumers are getting back out and spending more. Whether it’s at the grocery store or out on the road, consumer demand and healthy economic activity have ignited some inflationary effects, boosting prices higher. Though consumers and investors alike have valid reasons for concern, there are many ways to bolster a portfolio against the forces of inflation. From ex-US investing to snapping up gold and property, the ability to protect your portfolio should keep you sleeping well at night.


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