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Hedge Against High Inflation with these 5 Funds

Commodities are off to a scorching 2022 and can help you hedge against inflation, but recent history shows that it’s important not to overcommit to the asset class.


Given the recent performance of the energy sector, and commodities in general, it’s understandable to see prices rising and ongoing inflation and deduce that going head-first into commodities is the right play.

Before you do, it’s useful to take a look at recent history and crunch some numbers before making significant shifts within your portfolio.

In fact, investors need only look back to the market meltdown between 2007 and 2009 to find another period in recent market history where commodities were seen as a panacea.

For example, here are annualized returns for the iShares S&P GSCI Commodity-Indexed Trust ETF (GSG):

3 year: 13.06%

5 year: 9.49%

10 year: -4.02%

15 year: -3.91%

In contrast, here are annualized returns for the SPDR S&P 500 ETF Trust ETF (SPY):

3 year: 19.75%

5 year: 16.43%

10 year: 14.82%

15 year: 10.33%

In every one of those time periods, equities outpaced a broad basket of commodities.

However, commodities can and do outshine stocks in certain years. Just last year, the iShares S&P GSCI Commodity-Indexed Trust returned 38.77%, while the SPDR S&P 500 ETF returned 28.75%.

Of course, neither return is shabby, and investors would take either one, but it’s telling that commodities do lead in certain market and economic cycles, even those in which equities also perform well.

In fact, year to date, the commodities ETF is up an almost incredible 38%, while the SPY ETF is down 6%.

For years, I’ve advocated for broad diversification in long-term portfolios. If you are a subscriber to my Cabot ETF Strategist advisory, you are familiar with our more tactical approach to swing trading using ETFs.

This approach really focuses on capturing returns from asset classes currently in favor, even if that time frame only lasts a few days or weeks.

Clearly, right now, commodities constitute a leading asset class, one that you don’t want to be missing.

Traditionally, equities have been a strong hedge against inflation. Over the past decade, while inflation was low, the S&P 500 boasted an average return of 13.95%, or 11.95% when adjusted for inflation. However, while the S&P 500 is in negative territory year to date, inflation is running at a rate of 7.9%, the highest 12-month increase since June 1982.

As noted above, S&P returns in the recent past easily topped inflation rates, so investors have become complacent. Even financial advisors got into the habit of reciting, by rote, “Equities are the best hedge against inflation.”

But with that trope no longer applicable (for the moment, anyway), what’s an investor to do? After all, the purpose of long-term investing, particularly for retirement, is to have spending power when it’s needed. If their equity investments can’t keep pace with inflation, investors need a Plan B.

Of course, staying ahead of inflation is not the only concern; it’s also important to continue growing portfolio value. These days, commodity ETFs allow investors to accomplish both objectives.

4 Commodity ETFs to Hedge Inflation

Here are a few commodity ETFs that are among the year’s best performers so far:

  • iPath Series B Bloomberg Nickel Subindex Total Return ETN (JJN): This fund is up a whopping 62.3% year to date. As the name says, this fund offers exposure to nickel, one of the most widely used industrial metals. The fund uses a futures-based strategy, which has risks, but to capture the returns of nickel without physical exposure, or via a mining stock, this is a good option. Be aware: Volatility increased sharply in recent weeks, tracking the spot price of nickel.
  • Elements Rogers International Commodity Index ETN (RJN): This fund, which tracks an index of energy commodities, is up 54.3% so far in 2022. It, too, has been prone to wider price swings lately. It offers investors exposure to rising prices for crude oil, gasoline, heating oil, natural gas and other energy commodities. With energy being the leading sector this year, this fund is a targeted way to capture the current strength.
  • Teucrium Wheat ETF (WEAT): Recent strength in this ETF is due to the Russia-Ukraine war. With those two countries being among the world’s top wheat producers, there’s understandable concern about supply shortages, sending the price of wheat higher. The ETF has returned 47.9% year to date, with the entirety of those gains occurring in February and March.
  • iShares GSCI Commodity Dynamic ETF (COMT): This fund tracks its namesake index, offering exposure to a broad basket of commodities, using futures contracts. The commodity asset classes include the energy, metals, agriculture and livestock sectors. This ETF is up 34.8% year to date, and like other commodity ETFs, has seen more volatility since late February, as Russia invaded Ukraine and raised supply concerns.

Those are the best-performing commodity ETFs right now and are likely to continue performing well for as long as these inflationary trends continue. But keep in mind, these brief periods of outperformance aren’t sustainable over the long term.