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Hedging Inflation with 3 ETFs for 2022

Inflation fears have consumed Wall Street, but using ETFs for hedging inflation in your portfolio can help you weather the storm.

A commercial for a trading software platform a few years ago asked: “What do investors really want? Up, that’s what. Stocks that go up in price.” That’s a tough premise to argue. At a time when inflation is surging to its highest rates since the early 1980s, your allocation to equities becomes even more salient. But what if equities go into a slump at the same time inflation rears its head? Bonds won’t provide the return needed to stay ahead of inflation, although they do offer income. That’s where hedging inflation with ETFs comes into play.

Here are three equity exchange-traded funds that can help you generate income while markets are down, as well as growth when markets are in an uptrend.


Hedging Inflation with ETF #1: Vanguard Real Estate ETF (VNQ)

This market-cap-weighted ETF tracks the MSCI US Investable Market Real Estate 25/50 Index. According to MSCI, this index “is designed to capture the large-, mid- and small-cap segments of the U.S. equity universe. All securities in the index are classified in the Real Estate sector as per the Global Industry Classification Standard.”

Drilling down further, this ETF features built-in diversification within the real-estate sector. It invests in stocks issued by real estate investment trusts (REITs), companies that purchase office buildings, hotels and other real property.

The top 10 holdings are:

  • American Tower (AMT): REIT that owns cellular towers
  • Prologis (PLD): REIT that acquires and develops industrial properties
  • Crown Castle (CCI): REIT that owns wireless towers
  • Equinix (EQIX): Owns Internet connection and data centers
  • Public Storage (PSA): REIT that owns self-storage facilities
  • Simon Property Group (SPG): REIT that owns shopping malls
  • Digital Realty Trust (DLR): REIT that owns and manages technology-related real estate
  • SBA Communications (SBAC): Operates cellular towers
  • Realty Income (O): REIT that acquires retail properties
  • AvalonBay Communities (AVB): REIT that develops apartment complexes

The ETF’s 12-month dividend yield is 2.53%, and its total return is 33.06% year-to-date.

This is a potentially good inflation hedging ETF, as investors tend to like hard assets during inflationary environments, and real estate itself also generates income.

Corporate earnings and economic growth rates are expected to come down from 2021 levels but remain quite impressive, and companies with higher quality balance sheets and reliable profitability are expected to outperform.

Take a look at ETFs like the SPDR S&P Dividend ETF SDY.

Hedging Inflation with ETF #2: SPDR S&P Dividend ETF (SDY)

This ETF tracks performance of the S&P High Yield Dividend Aristocrats Index, which screens for companies that have consistently raised their dividend for at least 20 consecutive years.

Stocks are weighted according to yield. Because the index components have steadily increased dividends, by definition that means they have steady capital appreciation as well. So you’re getting the combination of growth and income, ideal for hedging against inflation. In addition, fund managers screen for profitability, so there is a tilt toward quality stocks.

This fund’s 12-month dividend yield is 2.83% and its year-to-date return is 20.09%.

The top holdings are:

  • AT&T (T)
  • AbbVie (ABBV)
  • Exxon Mobil (XOM)
  • Chevron (CVX)
  • National Retail Properties (NNN)
  • Consolidated Edison (ED)
  • IBM (IBM)
  • Realty Income (O)
  • Franklin Resources (BEN)
  • Walgreens Boots Alliance (WBA)

As you can see with a glance of the top holdings, this portfolio has a tilt toward large, well-established corporations. With corporate earnings and growth rates expected to decline in 2022, high dividend payers can pick up some of that slack.

One caveat: These larger, more mature companies tend to grow more slowly than smaller, newer firms, so you might see other indexes show better price appreciation at times, particularly during strong market rallies. In fact, that slight underperformance has been evident this year, largely due to the fact that the ETF isn’t heavily weighted toward the big techs that dominated S&P 500 price performance.

Hedging Inflation with ETF #3: SPDR S&P Bank ETF (KBE)

Higher bond yields result in better net-interest margin for lenders. That, in turn, results in greater profitability. Bank ETFs can be a good vehicle to defend against inflation.

The SPDR S&P Bank ETF tracks the performance of the S&P Banks Select Industry Index. The fund invests at least 80%, and usually more, of its total assets in the securities that constitute the index.

The index comprises publicly traded national money centers and regional banks. It has a tilt toward small value, which can be a mixed bag. Small caps tend to perform better during bull markets, while value stocks tend to perform better in bear market or recessionary environments.

Top holdings are:

  • Silvergate Capital
  • Signature Bank
  • Comerica
  • KeyCorp
  • Synovus Financial
  • Cullen/Frost Bankers
  • Bank of New York Mellon
  • SVB Financial Group
  • Fifth Third Bancorp
  • Regions Financial

This ETF has a 12-month yield of 2.08% and a year-to-date total return of 26.18%.

While bank ETFs can be very effective for hedging inflation, they have their limits. However, if inflation rises too quickly, consumer and business demand for loans may ease, resulting in stalled earnings growth for the banks.

If inflation increases and the economy continues growing, that helps banks’ profitability.

How concerned are you about inflation and your portfolio? Have you taken steps to mitigate those risks?


Kate Stalter is a Series 65-licensed asset manager, with more than two decades of experience in various areas of financial services. As an investment advisor and financial planner, Kate personally manages client portfolios, with a focus on successful retirement, including asset allocation, income generation and tax strategies.