- Inflation is the most important theme for ETF investing in 2021.
- Since the beginning of 2020 the Federal Reserve has increased the M2 money supply by over 25%.
- The key to protecting your portfolio from inflation in 2021 is identifying the ETFs that can benefit from inflation rather than getting hurt.
Since the beginning of 2020 the Federal Reserve has been running the printing press hot. The M2 money supply has been increased by over 25%. Typically, the M2 money supply increases at a pace of only a few percent per year. However, the Federal Reserve has made an effort to devalue the US dollar in order to keep the economy moving. Neel Kashkari head of the Federal Reserve Bank of Minneapolis on 60 Minutes literally agreed that they are flooding the system with money. He said the new policy is to deliberately over react, as he explain “there is unlimited cash at the Federal Reserve.” Clearly the Federal Reserve is doing whatever they believe is necessary to keep the economy moving along.
The critical question for investors is what they need to do in order to identify the Best ETFs for 2021. Inflation is bad for savers as it erodes the purchasing power of a dollar. However, inflation can be great for investors who focus on asset classes that benefit from inflation. Here is my view on the best ETFs for 2021 that are designed to hedge against inflation:
GLDB Strategy Shares Gold Hedged Bond ETF: This ETF is designed for investors who want to hedge their fixed income portfolio against inflation. The fund invests in a portfolio of investment grade corporate bonds and hedges 100% of the value of the portfolio to the price of gold. GLDB is designed to track the Solactive Gold Backed Bond Index. Essentially, it provides the yield of an investment grade corporate bond portfolio and the inflation protection of gold in one ETF. I like this ETF more than older gold ETFs because it provides both a yield and full exposure to the price of gold.
IVOL Quadratic Interest Rate Volatility and Inflation Hedge ETF
This fund invests in a portfolio of Treasury Inflation Protected Securites TIPS to hedge against inflation and trades interest rate derivatives to hedge against moves in interest rates. This fund is designed to make inflation and volatility the friend of your portfolio rather than its enemy.
IVV iShares Core S&P 500 ETF
The S&P 500 can be a wonderful inflation hedge. As the prices of goods and services rise, so does the price of goods and services provided by companies that are a component of the S&P 500 index. Historically, the S&P 500 has done a solid job of delivering a return that more than keeps pace with the rate of inflation.
Combining these three ETFs GLDB, IVOL, and IVV into an inflation hedge portfolio can serve as a solid way to let inflation work for you rather than against you.