3 Investment Opportunities to Hedge Against Inflation

By: Stacey Nickens

Inflation has risen rapidly during the past year. The Fed is raising interest rates to help combat inflation. 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 companies with strong free cash flow. 

Companies with strong free cash flow are better positioned to withstand higher, inflationary costs. With cash on hand, these companies can afford higher prices without having to take on significant extra debt. Additionally, you can look at value companies. Value companies tend to earn more of their revenues in the short-term. This compares to some growth companies, who may earn much more of their revenues in the future and thus not have immediate funds to afford higher prices. With this in mind, I have been watching shares in Exxon Mobil (XOM). Not only does this value company have strong free cash flows, the energy sector has been the strongest performing sector in 2022. 

Investors could increase their passive income yield. 

With interest rates on the rise, bond valuations have been dropping. Because of this, bonds may seem less appealing for income investors than in the past. Investors could counteract this problem by focusing on increasing their income yield through shares in preferred stocks.  Preferred stocks pay larger dividends than common stocks while also being less sensitive to rising interest rates than are bonds. Moreover, preferred stocks tend to be less sensitive to market volatility than are common stocks.

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.