What are the best inflation hedge assets?
There is no known asset class that is an effective hedge against inflation. People have put forward some suggestions, but none have been successful in either the short or long term.
- Real estate (32% of U.S. CPI)
- Infrastructure bonds
- Inflation-linked bonds
Inflation is a price increase, which translates to a reduction in buying power over time. The average price rise of a group of chosen products and services over some time might represent the pace of decline in purchasing power. As a result of the price increase, which is sometimes stated as a percentage, one unit of currency purchases less than it did in the past.
Investors use several asset classes to beat inflation when it goes high.
Real estate is the leading asset class for inflation protection
The real estate asset type has inherent value and generates continuous dividend income. Around the world, there is a persistent demand for housing. When inflation rises, so do property prices and, consequently, the rental yields.
Real estate is an illiquid asset class. Which means it cannot be instantly exchanged for cash. Hence, investors often consider real estate investment trusts (REITs), which can be easily traded and cashed.
Real estate is around a third of inflation indices
Real estate is an excellent inflation hedge because rent is generally the top component of an inflation index.
In the U.S. CPI, "Shelter" is 32% of the index.
Commodities are the first option for investors looking to hedge inflation
Commodities include oil, natural gas, precious metals(gold, silver), wheat, and maize. On the futures market, participants contract to trade commodities at a specified time and price in the future. An investor may acquire exchange-traded funds (ETFs) or commodity stocks. Investors may also acquire physical commodities like gold bullion bars, etc.
Commodities provide a natural hedge against inflation. As inflation drives the prices of all consumer goods, including commodities, investors may earn a healthy return on their investments when they invest in them.
However, investors must remain cautious as commodity trades and prices remain pretty volatile as they get influenced by unpredictable geo-political situations, weather, etc.
Stock investment provides long term hedge against inflation
For a longer-term inflation hedge, stocks are traditionally considered one of the best investments. On an average return basis, stock prices have expanded faster than inflation since 1927. It is because corporate profits tend to increase faster than inflation.
Investors looking to hedge inflation long-term tend to increase the proportion of dividend-paying stocks in their investment portfolio. Stocks with dividends will yield quarterly returns that will provide some relief to investors during high inflation periods.
Infrastructure investment remains relatively stable through inflation
Infrastructure like airports, roads, sea ports, energy, etc., correlate lower to stock indices. Also, infrastructure investments are non-cyclical because infrastructure development is always ongoing.
Usually, governments infuse the budget with infrastructure to spur spending. Hence, they remain an excellent option for diversifying investment.
Retail investors may choose to invest in ETFs related to several infrastructure plans.
Government issued bonds like Treasury inflation-protected securities (TIPS) are investment instruments to hedge against inflation
TIPS is a form of U.S. Treasury bond directly linked to inflation to protect investors during high inflation. TIPS payouts occur twice yearly at a predetermined rate. The principal value of TIPS fluctuates dependent on the inflation rate. Hence the return rate includes the primary value adjustment. TIPS are available in three maturities: five, ten, and thirty years.
There are similar treasury bonds by governments of various countries, for example, Inflation-Indexed Bonds (IIBs) in India.
- ↑ Rajgopal, Aishwarya. "What Is Inflation? Meaning, Types, Causes and More". BQ Prime. Retrieved 2022-10-13.
- ↑ Park, Jeong Yun; Mullineaux, Donald J.; Chew, It-Keong (1990-03-01). "Are REITs inflation hedges?". The Journal of Real Estate Finance and Economics. 3 (1): 91–103. doi:10.1007/BF00153708. ISSN 1573-045X.
- ↑ DeSilver, Drew. "As inflation soars, a look at what's inside the consumer price index". Pew Research Center. Retrieved 2022-10-13.
- ↑ "Commodities as an Inflation Hedge". CME Group.
- ↑ "Commodity price cycles: Causes and consequences". blogs.worldbank.org. Retrieved 2022-10-13.
- ↑ "Hedging Inflation with Equities". MSCI.
- ↑ t_heis (2022-06-22). "Is infrastructure a good hedge against inflation?". BlueOrchard. Retrieved 2022-10-13.
- ↑ "Treasury Inflation-Protected Securities (TIPS) Explained". Investopedia. Retrieved 2022-10-18.
- ↑ "FREQUENTLY ASKED QUESTIONS Inflation Indexed Bonds (IIBs)". Reserve Bank of India. line feed character in
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