What’s one way to defend against inflation?
If you’re aware of this debate, you may be wondering if ETF prices are affected by inflation, considering this is often the asset put forward as the solution.
In short, yes, ETF prices are affected by inflation. The price of anything you purchase with money is going to be affected by inflation. This includes everything from bubble gum to gold to cars.
However, some investors turn to certain types of ETFs to protect their portfolios when inflation seems like a real threat.
What Is an ETF?
First, let’s quickly provide a definition for ETFs to ensure we’re all on the same page.
An ETF (exchange-traded fund) is a fund that groups together stocks and/or bonds. It tracks a commodity, index, bond, or index fund.
However, while this may sound like a mutual fund, the major difference is that ETFs trade just like other stocks on an exchange. Therefore, they also go through the same daily price changes that stocks do.
This, combined with their lower fees and higher liquidity, make them an attractive alternative to mutual funds for many investors.
How ETFs Can Guard Against Inflation
Just like any other fund tied to stocks and bonds, ETFs will be affected by inflation.
That said, there can be some advantages to investing in ETFs when inflation is on the rise.
For example, TIPS ETFs are actually indexed to inflation, specifically to keep investors out in front of it. These Treasury Inflation Protected Securities are considered to be very low risk as they are backed by the U.S. government.
So, although they offer humble returns via fixed-interest rates, some may consider that a minor drawback during times of rampant inflation.
Another option could be to buy ETFs tied to commodities like gold, silver, platinum, and palladium.
Historically, precious metals have been among some of the more common hedges against inflation.
If you’re not keen on actually purchasing ounces of precious metals and storing them somewhere safe on your property – to say nothing of trying to sell them later – ETFs may provide an alternative.
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