By Sean Hannon, CFA, CFP, of EPIC Advisors from Covestor.com. The "Great Inflation" is coming. While that statement might seem odd in an environment where economic activity is collapsing and deflation threats remain, we need look no further than last week's statement from the Federal Reserve that it is intent on creating inflation and will do anything necessary to make it occur. The Fed indicated it will keep the size of its balance sheet at high levels, will continue purchasing large amounts of agency debt and mortgage-backed securities (MBS), and is prepared to purchase long-term Treasury securities. This translates to a Fed that will target various points on the interest rate curve, keep rates artificially low for a sustained period, and not stop until deflation ends and inflation returns. Right now, the Fed is all-in and will keep placing bets until it achieves its goals. That excess money at artificially low rates will lead to inflation is not a question of if, but when. The transition could occur as late as 2010, but it will occur, and investors should ask themselves how to prepare for the change. Modern portfolio theory teaches us that the risk of individual assets does not matter as much as the risks between assets in a diversified portfolio. With inflation coming, we should look for assets that will benefit from higher interest rates while offering low correlations with our existing portfolio. During inflationary times, precious metals and other commodities offer the best returns. With the advent of various ETFs, individual investors can easily craft commodity-based strategies. However, I will not be going in that direction. Pure commodity exposure offers limited income and wild volatility. Instead, I recommend diversified investments with strong income potential that offer commodity exposure and risk reduction-index funds of commodity-producing nations. Believing that commodities will outperform in an inflationary environment, we should expect the stock exchanges of commodity-producing countries to outperform as well. Three of the bigger commodity producers are Australia, Brazil, and Canada. By buying ETFs that track their markets, we will diversify our portfolio, earn an average dividend yield of 5.5%, and be positioned to benefit from an eventual return of inflation. Such a combination offers an excellent opportunity to effectively deploy capital in a challenging market. For these investments, I will be using the following ETFs: iShares MSCI Australia Index ( EWA), iShares MSCI Brazil Index ( EWZ), and iShares MSCI Canada Index ( EWC).
Investors in iShares MSCI Australia Index Fund saw new options become available this week, for the February 2015 expiration. At Stock Options Channel, our YieldBoost formula has looked up and down the EWA options chain for the new February 2015 contracts and identified one put and one call contract of particular interest.
Looking today at week-over-week shares outstanding changes among the universe of ETFs covered at ETF Channel, one standout is the iShares MSCI Australia ETF where we have detected an approximate $31.2 million dollar outflow -- that's a 1.8% decrease week over week (from 76,600,000 to 75,200,000). START SLIDESHOW:Click here to find out which 9 other ETFs experienced notable outflows » The chart below shows the one year price performance of EWA, versus its 200 day moving average: Looking at the chart above, EWA's low point in its 52 week range is $21.98 per share, with $27.51 as the 52 week high point — that compares with a last trade of $22.10.