ETFs for Deflation

For added aggressiveness, there is the 2X leveraged ProShares Ultra 20+ Year Treasury (UBT). Its opposite is the extremely popular ProShares UltraShort 20+ Year Treasury (TBT).

Another angle is corporate debt. One fund I've used for clients is the Federated Intermediate Corporate Bond (INISX). The economy isn't falling off a cliff and that means corporations will be able to pay their bondholders. Corporations have also been raising cash due to uncertainty over potential policies from Washington and the weak economy, and these stronger balance sheets are also good news for corporate bonds.

A solid ETF for intermediate corporate bonds is the Vanguard Barclays Intermediate Term Corporate Bond (VCIT).

For investors who anticipate deflation may be related to currency and sovereign debt, PowerShares DB U.S. Dollar Index Bullish Fund (UUP) and CurrencyShares Japanese Yen (FXY) should perform well. FXY has been the more likely to gain on days when the stock market drops, but UUP could have larger gains if Europe faces another round of debt fears. ProShares UltraShort Euro (EUO) is a 2X leveraged bet against the euro versus the U.S. dollar.

Moving out towards even more extreme deflation, gold is likely to serve as a defensive asset. For countries deep in debt, deflation makes their problem worse, not better, which is why many central banks and governments have tried generating inflation.

The safe haven appeal of the metal will grow during a bad bout of deflation and this should at least mitigate a decline in price. As with TIP, this may be a good choice for investors who are worried about inflation, although unlike TIP, gold may not perform well unless inflation becomes a serious problem.

iShares Comex Gold (IAU), SPDR Gold Shares (GLD) and ETFS Gold (SGOL) are all acceptable. In a bid to draw market share away from GLD, IAU recently split 10 for 1 and cut its fees to 0.25%, less than the 0.4% at GLD and 0.39% as SGOL.

Investors may want to short the market. For most investors, using short leverage is a bad idea because it will just lead to bigger losses. Timing is critical when playing the short side because the moves are much shorter and faster. Rebounds during a decline tend to be some of the biggest up days in market history, which means overstaying by even a day or two can be very costly.

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