Inflation-Themed ETFs: As Complicated as Inflation

Good proxies for inflation?

November 2021. Reading Time: 10 Minutes. Author: Nicolas Rabener.

SUMMARY

  • Given the importance of inflation as a topic, there are surprisingly few inflation-themed ETFs 
  • The few available pursue differentiated strategies that result in heterogeneous portfolios
  • The correlation of these ETFs to inflation has been relatively low

INTRODUCTION

Creating an investment framework is challenging as investing is complex and complicated. We need to educate ourselves about various wildly different asset classes and strategies, deal with frequently conflicting and contradictory financial and economic research, differentiate between theory and practical implementation, and carefully consider the emotional aspects that affect our buying and selling decisions.

As if that was not already difficult enough, theoretically, the objective of each investor should be to generate positive real returns, which adds an additional layer of complexity given that we need to account for inflation.

Over the last two decades, inflation was relatively low in the US and Europe and therefore has been mostly ignored by investors. However, in 2021 inflation reached levels unknown to the majority of investors active in financial markets today, e.g. consumer prices in the US rose 6.2% in October, which represents the steepest increase since 1990.

Given the popularity of ETFs, it is interesting to peruse the available options. However, somewhat disappointingly, there are only five inflation-themed ETFs in the US, ignoring ones that provide simple exposure to Treasury Inflation-Protected Securities (TIPS).

In this research note, we will explore these five inflation-themed ETFs (read Building an Inflation Portfolio Using Stocks).

ASSETS UNDER MANAGEMENT

Searching for ETFs in the US that are focused on inflation results in only five products. The cumulative assets under management are only slightly more than $1 billion, which is surprisingly low given that inflation affects the portfolio of every investor. In comparison, TIPS ETFs manage almost $100 billion in assets. 

Furthermore, almost all the