Equity Funds for Inflation Protection

These funds are in consumer durables and real assets, which can withstand inflationary pressures

Kate Lin, CAIA 28.05.2021
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An investor seeking an inflation hedge does not need to be confined to bond investing. Sector equities like consumer defensive and real assets are generally inflation-protected as well.

 

Bull or Bear Market, We Always Need Shampoo

Consumer defensive companies, or consumer staples, tend to do well under inflationary environment. This is because products like groceries and basic household items are essentially the components measured in the composite price indexes, showing positive correlation relationship. Among US-listed ETFs, there are two low-cost funds you might consider: Vanguard Consumer Staples ETF (VDC) and Fidelity® MSCI Consumer Staples ETF (FSTA), with a Morningstar Quantitative Rating of Gold and Silver respectively.

Consumer Defensive ETF

Both funds have an exposure to nearly 100 stocks, primarily in US large-cap value style. Top holdings are some household names like Coca Cola (KO), packaged food company Kraft Heinz (KHC) and cleaning supply maker Clorox (CLX).

The Vanguard product that tracks the MSCI US Investable Market Index/Consumer Staples 25/50, has US$ 5.8 billion under management. The fund earns an above-average rating in people as the fund benefits considerably from Vanguard’s resourceful equity team. Another appeal of this fund is the dividend payout, which amounts to 4.35% in 2020. In comparison, the Fidelity’s team earns an average rating due to the recent team turnover. “Even though it is a passive fund, high turnover can still hinder the effectiveness of the investment process.” However, the Fidelity product’s expense ratio is slightly lower than that of Vanguard, charging 20 basis point less in expense ratio.

Moreover, investors have to be alert to the fact that these funds are non-diversified and have deliberate exposure into one equity sector.

 

Positive Correlation

Another broad category that can serve as inflationary hedge is real assets. There’s no standard definition for what qualifies as a real asset, but in general, these investments are linked to tangible holdings with intrinsic value.

Examples are real estate, agricultural crops, commodities. They provide economic exposures to inflation rise. Besides directly owning a real asset, an investor might take a position in a company or stock that derives its value from real assets for some exposure.

In the case of energy, investors have to note that the price changes of energy commodities are not often fully reflected in the share prices of energy operators. Other factors, including company management and operational efficiency could influence share prices on top of energy pricing. For example, Gold-rated Tortoise North American Pipeline (TPYP) and Vanguard Energy ETF (VDE). 

Real Asset ETF

In addition, the diversification benefits offered by real assets are a plus, too. While inflation immunity dominates the conversation around real assets, these investment exposures exhibit characteristics that are differentiated enough from traditional stocks and bonds to serve as a compelling strategic weight in a broadly diversified portfolio.

 

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About Author

Kate Lin, CAIA

Kate Lin, CAIA  is a Data Journalist for Morningstar Asia, and is based in Hong Kong

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