Inflation is here and it is real, and with that we are getting a creep back to normalcy in terms of interest rates. As of 2/19 the 10 Year Note had climbed up to 1.92%, a move of 50 basis points in the past year. The long running rate on the 10 year is nearly 3%. With that in mind and the Fed set to raise the Fed Funds rate as much as 1% over the next year, a rising rate environment can cause big disruptions across various asset classes. How can you prepare your portfolio for this shift? Here are some options.
INVESCO DB COMMODITY INDEX TRACKING FUND (DBC)
For older investors an increase in inflation can erode a portfolio return. If inflation is 7% as we are seeing currently, a return of 10% on a portfolio will only net an overall return of 3%. With that in mind one might want to consider the DBC to hedge against that inflation. As of 2/18 the fund had already returned over 10% YTD and over a one year period the fund has returned over 40%.
SPDR SELECT SECTOR FUND – FINANCIAL (XLF)
The XLF is the largest financial sector exchange-traded fund with more than $45 billion in assets. Top holdings include Berkshire Hathaway Inc. (BRK.A, BRK.B), JP Morgan (JPM), Bank of America (BAC) and Wells Fargo (WFC). Financial firms are a good play in a rising interest rate environment as Banks increase the rates they charge for loans they write while many having borrowed funds at a lower rate in more friendly times. This creates a very attractive spread for the financial service firms. The one year return on the XLF is over 20%.
iShares TIPS Bond ETF (TIP) Treasury inflation-protected securities – or TIPS are an obvious play against inflation. TIPS value is benchmarked to the consumer price index. When the consumer price index rises – and interest rates as well, TIPS will also rise to adjust for that inflation.
AXS Astoria Inflation Sensitive ETF (PPI) The fund is an actively managed, broadly diversified ETF that seeks long-term capital appreciation in inflation-adjusted returns. The fund invests where the opportunities are: cyclical stocks (such as financials, energies, industrials and materials), commodities and TIPS. The fund has 50 holdings, Marathon Oil, Devon Energy are two of the larger positions currently. The fund is still in its infancy but has returned over 4% YTD.
Amplify Inflation Fighter ETF (IWIN) The fund is a mix of inflation-sensitive stocks and commodity futures contracts. The ETF has exposure to mining companies, land developers, homebuilders and real estate investment trusts as well as agriculture, gold and bitcoin.