3 Investment Opportunities to Hedge Against Inflation

By: Stacey Nickens

Inflation rapidly accelerated in June, with the consumer-price index increasing 5.4% from a year ago. This is the highest 12-month rate increase since August 2008, but don’t panic just yet. A number of factors contributing to inflation are temporary. Supply shortages will likely subside, as will the sudden increase in spending due to pent-up consumer demand. However, even if inflation levels out, investors could still take some measures to protect their long-term purchasing power.

Investors could increase their exposure to Treasury Inflation-Protected Securities (TIPS).

The principal of a TIPS increases with inflation and decreases with deflation. Upon maturity, a TIPS either pays out its adjusted principal or its original principal, whichever is greater. At the very least, TIPS guarantee the repayment of your principal, and if inflation were to rise, your principal would increase to help protect your purchasing power. With that in mind, you could consider investing in the SPDR Portfolio TIPS ETF (SPIP). This ETF gives you broad exposure to the full range of the TIPS market for a relatively low fee.

Investors could focus on growth opportunities. 

Pretend the inflation rate rose to 2%. To protect your purchasing power, your investments would need to post annual returns of more than 2%. Investing in healthy, growth-oriented companies could assist you in achieving those higher annual returns. With that in mind, I have recently been watching positions in the Chinese automobile manufacturer, NIO. NIO has made significant business advancements in recent times. Their company is thus poised for strong growth moving forward, and you could benefit from this growth by buying shares while they are still affordable. To begin with, the first-ever electric vehicle industry park (NeoPark) launched in May, and NIO will be the largest participant in NeoPark. As a result, NIO will have access to some of the best technology and products, allowing them to remain competitive in the electric vehicle industry. NIO is rapidly advancing production of their battery swap and charging stations and are making these stations available to other companies. Doing so will allow them to generate revenue from additional sources, as will their upcoming expansion into Norway.

Investors could increase their passive income yield. 

With historically-low interest rates, investors are struggling to generate sufficient income from traditional, lower-risk investments. Investments with low yields may offer guaranteed income, but if inflation rises, that guaranteed income rapidly loses its purchasing power. Investors could counteract this problem by focusing on increasing their income yield. Investors could accordingly look into the BlackRock Multi-Sector Income Trust (BIT), which offers a current yield of 7.95%. This trust is able to boost its yield by diversifying its portfolio and by relying on leverage. However, even with these yield-boosting strategies, the fund’s largest positions are backed by either the U.S. government or one of its agencies. Investments in government-backed positions as well as diversification provide this fund with strong protection against default risk.

Depending on your unique situation, you could also look at other investment opportunities, such as investments in I bonds or in industries that tend to grow in-line with inflation. Either way, I encourage you to reach out to a registered investment advisor to ensure you’re making the best decisions given your unique financial situation.

Disclosures: Past performance is not a guarantee or a reliable indicator of future performance. All securities carry a unique set of risks subject to a variety of factors. There is no guarantee that these investment strategies will work under all market conditions or that they are are suitable for all investors. This material has been distributed solely for informational purposes and should not be considered as individual investment advice or recommendation. Individuals should consult their investment professional prior to making an investment decision.