ETF Strategies to Play Higher-Than-Expected September Inflation

The annual inflation rate in the United States slowed for a sixth successive month to 2.4% in September 2024, the lowest since February 2021, from 2.5% in August. However, figures came above forecasts of 2.3%.  The monthly core inflation rate remained at 0.3%, the same as in August but above forecasts of 0.2%. Inflation accelerated for food (2.3% versus 2.1%) and transportation (8.5% versus 7.9%).

Against this backdrop, below we highlight a few exchange-traded fund (ETF) investing strategies that can be gainful for investors.

Play Inflation-Fighting ETFs

In the recent past, Wall Street saw launches of several inflation-fighting ETFs like Horizon Kinetics Inflation Beneficiaries ETF INFL. Plus, there are TIPS ETFs like iShares 0-5 Year TIPS Bond ETF STIP. For example, the underlying ICE US Treasury 0-5 Year Inflation Linked Bond Index of the STIP ETF comprises of inflation-protected U.S. Treasury bonds with remaining maturities of less than five years. The STIP ETF yields 2.74% annually.

Play ETFs That Protect You From Higher Rates

In reflection of the sticky inflation data and the likelihood of less rapid Fed rate cut, bond yields jumped lately. U.S. benchmark treasury yields closed at 4.09% on Oct. 10 2024, up from 3.74% recorded at the start of the month. Many Fed officials have been arguing that a measured approach in the policy easing would better control inflationary risks.

Against this scenario, ETFs that offer protection from higher rates should be in vogue. These ETFs include Simplify Interest Rate Hedge ETF PFIX, Global X Interest Rate Hedge ETF RATE and FolioBeyond Alternative Income And Interest Rate Hedge ETF RISR (read: ETF Strategies to Follow Amid Rising Treasury Yields).

Gold: A Better Bet?

A stagflation-like scenario could boost safe-haven assets like gold. Gold performs well in periods of economic stagflation as investors tend to exit stocks, bonds, and cash. Investors should note that gold is often viewed as an inflation-beating asset. The last significant episode of inflation in the United States occurred from 1973 to 1979. Within this period, inflation averaged around 8.8% annually, and gold earned an average annual return of 35%, per CME Group, as quoted on Forbes. SPDR Gold Shares GLD is thus a good pick (read: 9 Top Global ETF Trends So Far This Year).

Value Stocks: A Safer Bet

Value stocks are often considered defensive investments because these companies normally have established businesses and stable earnings. Value stocks often pay dividends. Unlike growth stocks, value stocks tend to perform better in a high-rate environment. The Zacks Rank #2 (Buy) ETF Vanguard High Dividend Yield ETF VYM yields 2.81% annually and charges 6 bps in fees (read: Why You Should Buy Dividend ETFs Now).

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