The prospect of higher inflation may have some investors contemplating a shift in their investment strategies. While diversified portfolios contain assets that often perform better than others during times of higher inflation, hedging may not be limited to exposure to Treasury inflation-protected securities (TIPS) or corporate inflation-protected securities (CIPS).
8 Assets to inflation-proof Your Portfolio
- Precious metals (gold, silver, crypto)
- Inflation hedge-type stocks (durable goods, etc.)
- Green Transition (companies like Tesla (TSLA) - Get Tesla Inc Report owns SolarCity)
- Natural resource equities
- Real Estate and REITs (Real Estate Investment Trust)
- TIPs (Treasury Inflation-Protected Securities)
TheStreet discussed these assets and other inflationary investing strategies during a recent webinar, How to Play the Inflation Trade, brought to you by VanEck.
Our roundtable discussion, hosted by TheStreet's Susan McGinnis includes:
- David Schassler, Portfolio Manager of the Inflation Allocation ETF, RAAX, at VanEck
- Bob Lang, Action Alerts Portfolio Manager
- Nancy Davis, CIO, Quadratic Capital Management
TheStreet's Susan McGinnis hosts the 45-minute conversation, see the excerpt above or watch the full webinar below.
Precious Metals (Gold, Silver, Crypto)
There are beneficiaries in an inflationary environment and some real assets tend to historically perform well in periods of high inflation. Commodities, gold, natural resources, infrastructure, and REITs tend to respond to different inflationary regimes.
00:12:30: David Schassler, Portfolio Manager of the Inflation Allocation ETF, RAAX, at VanEck, emphasizes that “when you get higher inflation, commodity prices immediately respond to the supply and demand imbalances. Natural resource equities are the companies that benefit directly from higher commodity prices. They outperform.” He adds that in “previous inflation cycles, gold responds in the second half because people wake up to the idea that they have an inflation problem.”
Crypto is challenging gold with its key attributes of a finite supply and counterfeit-proof asset. Schassler remarks that the new generation sees crypto as a gold alternative - one with “total returns that exceed that of gold and really everything else.”
Gold prices hit a record high in August 2020, with the precious metal topping $2,000 per ounce. The pullback in prices and lack of a further bump in demand is partially a reflection of the stimulus and monetary policies that have injected the market and made riskier assets more attractive. At the same time, cryptocurrencies are taking over the traditional spotlight that features gold.
00:10:40: As the price of gold hovers near a historic high, Bob Lang, co-portfolio manager of TheStreet's Action Alerts PLUS and Trifecta Stocks, notes that “in an inflationary environment... you're going to see more people trying to get away from the fiat currency. Hard commodities that are a little bit more reliable and safe than the fiat currency that we currently use today”
Inflation Hedge-Type Stocks (durable goods, etc.)
00:11:20 Lang says that long with precious metals, there are inflation-hedging equities that have good, strong yields. “Consumer durables, names like a Coca-Cola (KO), Procter and Gamble Company (PG). You know they’re boring, they’re old, but they do offer safety and they offer a yield and protection.”
Lang is watching the cargo containers languishing offshore at ports around the nation and says he sees opportunity “One group that I think is going to benefit, certainly in the short term and the long term, are the rails. I think this group can raise prices because deliveries need to happen.” Lang suggests companies including CSX Corporation (CSX), Norfolk Southern Corporation (NSC), and Kansas City Southern (KSU) “Also I see banks and financials having the same sort of advantage.”
00:30:20 "A couple of names that we've been playing around with are First Solar, which is a name that's been around for quite a while, and SunPower, SPWR," said Lang. "A couple of these companies are primed and ready for the investments that the government wants to make in the green environment. So I think solar is a no-brainer."
House lawmakers approved the $1 trillion bipartisan infrastructure bill following months of deliberations. The legislation brings federal investments in infrastructure for the nation's roads, bridges, mass transit, airports, rail, ports, and waterways. Schassler mentions that infrastructure companies tend to pass inflation along to their customers, so “the rates have always done well. When real estate rises with inflation, as well as rents do as well...those are the assets that benefited the most during the '70s. Those are the assets that benefited during the inflation cycle that we had, the short cycle that we had, in the early to mid-2000s. And those are the same assets that are responding right now.”
Lang believes that the rail sector will perform well in the mid-to-long term, “I think this group can raise prices because deliveries need to happen. We've noticed that more recently supply chain issues. We've seen a lot of ships that are sitting out in the seas, especially off of California, waiting to get unloaded and waiting to get taken to their destination...rail companies can raise prices because these deliveries have to be made.” He names Union Pacific, Consolidated Rail, CSX, Norfolk Southern, Kansas City, Southern as companies with a great advantage to raise prices and as opportunities.
Real Estate and REITs (Real Estate Investment Trust)
David Schassler, Portfolio Manager of the Inflation Allocation ETF, RAAX, at VanEck sat down with TheStreet's Susan McGinnis, as part of our FREE webinar series: How to Play the Inflation Trade, brought to you by our partners at VanEck.
Watch the full interview and learn what investors should do now.
00:02:15 "If you look at the shelter component of the CPI, that's the largest component of the CPI. That's about one-third. Now here's the thing with shelter. So shelter components are up 3.5%. If you go out and ask the average American who's been out looking for new housing over the last year, if their shelter costs are up 3.5%, they're going to say that does not pass the sniff test. Because when you look at housing prices, housing prices are up well over 20%," said Schassler.
"That's why we believe there's going to be persistent upward pressure on the shelter component, not to mention wages. Employees are looking around, seeing higher costs everywhere. They want to maintain their standard of living, so they're asking for wage increases. That's putting upward pressure on the goods and services that we all purchase."
Natural Resource Equities
00:23:00 "So we manage the VanEck Inflation Allocation ETF. And it's basically that. We go and invest in the investments that we think are best positioned to benefit directly from inflation. So the ticker is RAAX. And what it does is invest in commodities, natural resource equities, gold. It does have some Bitcoin exposure. It does own some REITs. It also has some infrastructure investments. And it has some yield plays," said Schassler.
"So when you really just bottle that down and you look at what we have, it's really the assets that have historically done best during high inflationary periods. And it's doing that right now."
How to Play the Inflation Trade:
Watch below, or watch it on YouTube, and be sure to follow us!
Video Highlights| How to Play the Inflation Trade
- 00:06:30 Can the Federal Reserve stop inflation?
- 00:10:40 Stocks to benefit in an inflationary environment
- 00:11:20 Inflation-hedging equities with strong yields
- 00:12:30 Key moves to inflation-proof your portfolio
- 00:21:30 What history tells investors about inflation
- 00:23:00 Inflation Allocation ETF, RAAX
- 00:30:20 Companies investing in the green transition
- 00:31:30 Why investors should consider the energy sector
Editor's Note: This webinar was recorded on October 28, 2021