Inflation is coming, so how to invest for that?
According to Jason Bloom, director of global market strategy for Invesco PowerShares, broad commodities are a better inflation hedge than treasury inflation protected securities (TIPS), plain vanilla treasuries, and gold.
“Typically as inflation is increasing, interest rates are increasing,” Bloom said during a recent media call hosted by Charles Schwab that dealt with exchange-traded fund investing in a protectionist world. “That is a headwind for any bonds with some duration sensitivity.”
According to Bloom, commodities have had a 0.8 correlation to the consumer price index (CPI) during the past decade (1.0 would be a perfect correlation). He said PowerShares had predicted the CPI would trend higher against a weakening U.S. dollar.
“Between the global growth dynamic improving and the dollar trending lower, its very easy to make the case that CPI is going to trend higher,” Bloom said.
CPI growth won’t happen right away, but he believes it is much likely to go higher than lower, making “commodities the most reliable hedge historically to increasing inflation.”
During the call, Bloom offered up two of his company’s ETFs as a way to play the commodities-as-an-inflation-hedge theme: the PowerShares DB Commodity Index Tracking Fund (DBC) and PowerShares Optimum Yield Diversified Commodity Strategy No K-1 Portfolio (PDBC). Of course, investors who buy into the notion of commodities as a way to hedge inflation—and tap into global growth—have numerous ETFs to choose from.
Then again, global growth could take a hit if President Trump’s tariffs on aluminum and steel instigate a trade war.