With the unemployment rate pushing 10% and the housing market still hobbled, inflation seems more like a distant memory than a near-term possibility. But as signs of economic growth slowly surface, interest is perking up for investments that could do well in an environment of rising prices or increasing interest rates.

According to a recent Wall Street Journal poll, economists expect U.S. GDP growth to rise to 3% by the end of the year, a slight increase from 2010. Despite this benign outlook, government measures to stimulate the economy and boost growth continue to raise concerns about inflation, while demand from emerging market economies provides a solid backwind for commodity prices.

"We believe that financial advisors are showing interest in commodity ETFs and other products because they have historically done well in an inflationary environment," says Bryon Lake, senior product strategy manager at Invesco PowerShares. "We think this will be an important issue for 2011 and going forward."

A number of ETF options stand to benefit if a reflation scenario begins to unfold this year.

TIPS. The securities behind TIPS ETFs have a fixed coupon. However, interest payments fluctuate over the life of the bond along with its inflation-adjusted principal value. Bond prices also reflect changes in marketplace interest rates and demand.

Although they are considered inflation-linked securities, their returns can exceed or fall short of their inflation bogey, the Consumer Price Index. And they can underperform traditional Treasury securities or lose value when interest rates rise sharply or demand drops.

In 2008, TIPS underperformed traditional Treasurys when investors fled to the perceived safety of the latter investment in 2008, according to a Vanguard study. In 2005 and 2006, rising real interest rates produced negative inflation-adjusted returns. But in seven years over the last decade, TIPS' returns exceeded inflation.

There are half a dozen TIPS ETFs on the market from Barclays, PIMCO, State Street Global Advisors and Schwab. Even in this seemingly homogenous group, performance can vary with index construction and other factors. The iShares Barclays TIPS Bond Fund (TIP), with $20 billion in assets, represents the bulk of the TIPS ETF market. With an effective duration of 4.8 years, the fund is somewhat less sensitive to interest rate fluctuations than PIMCO's 15+ Year U.S. TIPS Index Fund (LTPZ), which has an effective duration of 7.4 years.

The difference can have a big impact on returns. From the beginning of the year until December 20, 2010, a time of declining rates and rising bond prices, the longer duration PIMCO fund had a total return of 8.23%, compared with 5.68% for the Barclays offering. Of course, the leaders could change if interest rates go up.

The latest twist in TIPS ETFs is funds with shorter durations, which are designed to derive a greater portion of their returns from inflation-adjusted income rather than changes to principal. Because of their shorter durations, they are less sensitive to fluctuations in marketplace interest rates than their longer-term cousins. Launched in December 2010, the iShares Barclays 0-5 Year TIPS Bond Fund (STIP) has an effective duration of 1.7 years while another short-term offering, the PIMCO 1-5 Year U.S. TIPS Index ETF (STPZ), goes out to 1.5 years.

Other fixed-income. The weak correlation between TIPS and the Consumer Price Index led to the creation of an inflation-hedging ETF, the IZ CPI Inflation Hedged ETF (CPI). Launched in 2009, the fund's goal is to provide a real return above the rate of inflation by investing in short-term Treasury bonds and Treasury bills, as well as investments that track the price of commodities such as gold or oil.

Short maturity fixed-income ETFs, while not specifically designed for inflation, would nonetheless hold up better than longer-term funds in a rising rate environment. Popular choices include the iShares Barclays 1-3 year Treasury Bond (SHY), iShares Barclays 1-3 Year Credit Bond (CSJ), and Vanguard Short-Term Bond (BSV). Offerings at the shortest end of the yield curve include SPDR Barclays Capital 1-3 Month T-Bill (BIL) and PIMCO Enhanced Short Maturity (MINT).

Commodities. While TIPS follow U.S. inflation and interest rate trends, they aren't directly impacted by economic growth and inflation in other parts of the world, as commodity prices are.

According to a report by Bank of America Merrill Lynch, commodity inflation "is likely to outperform broader inflation measures as a recovery geared toward raw materials takes place over the next couple of years." While tighter monetary policies in emerging markets could create a headwind, the firm believes robust consumer spending and government spending on infrastructure will provide support.

While sharp increases in precious metals prices focused most of the attention on gold and silver ETFs last year, profits were more modest in other corners of the commodity market. Most of the diversified offerings delivered respectable single-digit returns, while those focusing on gas suffered significant losses.

Monetary concerns have trumped inflation worries as the main driver of gold prices recently, and this year Standard & Poor's economists project that stagnant production and flight by investors from currency risk will help raise the price of the metal to $1,600 an ounce. The most popular choice by far for ETF investors seeking gold exposure is SPDR Gold Shares (GLD), which holds over $57 billion in assets. At $5.5 billion in assets, iShares Gold Trust (IAU) comes in second.

J. Michael Martin, the president of Financial Advantage in Columbia, Md., has 7% of his firm's core portfolio in SPDR Gold Shares. "Gold is a currency that can't be printed, and is accepted all over the world as a store of value and medium of exchange. As national debt piles up and confidence in paper money declines, gold goes up," he says. "It's a long-term play, not a trade."

Other commodities are also on advisors' radar screens. At Capital Cities Asset Management in Austin, Texas, Director of Wealth Management Brian Campos uses Market Vectors Agribusiness (MOO) to benefit from anticipated "agflation" in the price of soybeans, corn and other farm products. The ETF, he says, "is a good way to get exposure to a commodity sector that would be difficult to access otherwise."

Commodities tied to manufacturing, such as copper, lead, iron ore, coal and oil should benefit from dollar depreciation and indirect exposure to surging growth in emerging markets, according to LPL Financial Research. Exchange-traded notes that follow those commodities include iPath Dow Jones-UBS Industrial Metals (JJM) and iPath Dow Jones-UBS Copper (JJC).

"Many advisors may choose a broad-based ETF for longer-term strategic allocations, and the commodity sector-specific offerings for tactical trading," says Lake. "Others may have a fixed commodity allocation of, say, 10%, and rotate between two commodity sectors they think will do well over the short term."

Emerging market equities and REITs. In addition to offering a more robust growth story than developed countries, emerging market stocks and bonds stand to benefit from appreciating currencies relative to the dollar, according to LPL. Real estate investment trusts could also be a beneficiary of reflation and rising property values, particularly in foreign markets. Diversified REITs such as iShares Dow Jones U.S. Real Estate Index (IYR) and Vanguard REIT (VNQ) stay in this country, while offerings such as SPDR Dow Jones International Real Estate (RWX) or FTSE EPRA/NAREIT Developed Asia (IFAS) venture abroad.

Inverse ETFs. By providing inverse exposure to Treasury bond prices, exchange-traded funds such as ProShares UltraShort 20+ Year Treasury (TBT) or Direxion Daily 10-Year Treasury Bear 3X (TYO) are a direct way to cash in on falling bond prices and rising yields that often accompany inflationary times.

These aren't for the faint of heart. The use of leverage amplifies returns in both directions, while the compounding of daily returns means they will not move in a precisely opposite direction of their target for more than a day. Because of these funds' whipsaw volatility, most people view them as part of a closely guarded short-term trading strategy that will produce outsize returns if interest rates increase and crushing losses if they head south again. 

The Taxing Side Of Commodity ETFs And ETNs
Investors hoping to profit from rising commodity prices with commodity exchange-traded funds and exchange-traded notes should note the different tax treatment of these investments when they are held in taxable accounts.

SPDR Gold Shares, as well as the popular iShares Silver Trust (SLV) and iShares Gold Trust (IAU), are backed by stores of the precious metal held in secure vaults. Because they are structured as grantor trusts and treated as collectibles for tax purposes, investors are taxed upon sale at ordinary income rates.

ETFs that use futures contracts, such as the broad-based PowerShares DB Commodity Tracking (DBC), operate under a different set of tax rules. Annual income and profits are generally taxable and reported each year on a Schedule K-1. Upon sale of the shares, 60% of gains are taxed at long-term rates and 40% at short-term rates.

Yet another version, exchange-traded notes, trade on stock exchanges but are really unsecured promissory notes designed to track a particular commodity index. Examples of these include the iPath Dow Jones UBS Commodity Index (DJP) and other iPath offerings for specific commodities such as copper, oil and grains. These products typically produce no interest income and are subject to long-term capital gains rates if held for at least one year and short-term rates if held for under a year.