Inflation is a persistent issue investors need to tackle in order to protect the purchasing power of their capital. For this reason, the pressure on investors to come up with effective hedging strategies against inflation is persistently high.
Luckily, there are ample strategies that allow investors to boost their overall returns to account for inflation without losing the value generated by their investments over time.
Furthermore, certain asset classes tend to be more resilient in the face of inflation, as the demand for assets like gold is inversely correlated to fiat currencies.
Using a combination of different inflation hedging strategies can help you achieve your goal of protecting and growing your investments over time. To learn more about how to safeguard your investments, try one of these hedging strategies prepared by Axiory experts.
Invest in TIPS
Treasury Inflation-Protected Securities, or TIPS, are government bonds designed to protect investors from inflation and are particularly appealing to risk-averse long-term investors.
The principal value of TIPS adjusts in accordance with the Consumer Price Index (CPI), which ensures that the value of the bonds rises with inflation.
For forex traders, TIPS serve as a safe haven, as they provide a stable return adjusted for inflation. Conversely, stock traders can buy ETFs tracking TIPS, such as the iShares TIPS Bond ETF (TIP).
Overall, TIPS are the most risk-averse method of hedging against inflation, which is applicable and easily accessible to both stock and forex traders.
Long Positions in Commodities
Commodities, such as oil and gold, are known for being resilient against inflation, as the price of these commodities tends to rise with inflation.
Forex traders can take long positions in currency pairs involving commodity-linked currencies, or buy XAU/USD or WTI futures, or stocks in companies, such as ExxonMobil, Occidental Petroleum, Barrick Gold, or others.
In general, essential commodities tend to have a stable demand, which ensures that their price rises with inflation, which is a feature investors can use to hedge their portfolios.
Short-Sell Bonds
When inflation rises, bond prices typically fall, especially for long-term bonds. This creates a potentially profitable opportunity for investors to open short positions on these bonds, or the ETFs investing in them.
For example, stock traders can choose to use inverse bond ETFs like the ProShares Short 20+ Year Treasury (TBF).
However, it is also worth noting that this is a strategy commonly used by financial institutions, which means that the window of opportunity for retail investors to take advantage of it is typically quite narrow.
Hedging using inverse bond ETFs is the most accessible method of shorting bonds, as it does not require for beginners to be experienced in how short-selling works.
Invest in REITs
Real-estate investment trusts, or REITs, are effective for hedging against inflation, as they invest in real assets, such as land, residential and commercial real estate, office spaces, manufacturing properties, data centers and more.
The price of real estate tends to beat inflation over time, which makes REITs attractive for investors. Furthermore, REITs also generate cash flow through rental income and the sale of property, which further boosts the returns to investors.
There are numerous REITs listed on major stock exchanges and investors can overview the specific assets they invest in. It is also worth noting that REITs distribute at least 90% of their profits as dividends to investors, which, coupled with the price growth of the REIT, can deliver substantial returns, while also safeguarding capital from inflation.
Invest in Growth Stocks
Growth stocks, such as those in the tech sector, tend to perform exceptionally well during bullish periods on the market, which also means that they beat inflation in the process.
However, it is worth noting that sudden shifts in market sentiment also tends to adversely affect high growth stocks, which can eradicate prior gains fairly quickly.
Stocks that have pricing power and strong profit margins tend to be best suited for such investments. For example, the stock of Apple (AAPL) has been able to beat inflation consistently for over 2 decades, making it a great choice for inflation-hedging.