How to invest to hedge inflation: Inflation sensitive ETFs

With inflation data consistently exceeding expectations, Financial Futurist Dave Nadig joins Wealth! to discuss strategies for building inflation-proof portfolios.

Nadig suggests that Bitcoin (BTC-USD) could be a "viable target" for ETF investors, noting the cryptocurrency's 71% rise in 2024 despite persistent inflation. However, he advises against "building your portfolio around that" and recommends a more moderate allocation of at least 3-4%.

Instead, Nadig recommends that investors look to "inflation-targeted allocation solutions," such as the AXS Astoria Inflation Sensitive ETF (PPI), which holds a mix of stocks designed to combat inflationary pressures. According to Nadig, the key is to take a "broad approach" to portfolio construction, ensuring exposure across all market sectors. This diversification, he explains, can help cushion against the impact of inflation on individual asset classes.

For more expert insight and the latest market action, click here to watch this full episode of Wealth!

Editor's note: This article was written by Angel Smith

Video transcript

- To break down where you can invest to hedge inflation, Dave Nadig, who is the financial futurist, here with us in studio part of our ETF report brought to you by Invesco QQQ. Dave, great to see you in person.

DAVE NADIG: Great to be back.

- Absolutely. So let's start off there when we think about how people are trying to inflation proof their investments, where is the number one, the first thought that should come to their mind?

DAVE NADIG: Well, it's funny that you mention Bitcoin because that's one that's come up a lot. It is up 71%, so far, this year. It's a little tough to say that that's a direct inflation hedge. But clearly, that's part of the Bitcoin story.

And for ETF investors, that's now a viable target. Right, we've had $14 billion flow into the nine new ETFs targeting Bitcoin since the middle of January. Obviously, a tremendous amount of investor interest there.

But I think even the most aggressive financial advisors I talked to, suggest sort of 1%, 2%, 3%, 4% type allocation. So you're clearly not building your portfolio around that. What I'm hearing more and more is folks looking for inflation targeted asset allocation solutions.

The one I probably highlight is from Astoria, ticker is PPI. It's their inflation sensitive ETF. And that kind of does what you would get if you asked a bunch of advisors all the question what to do about inflation? You get some defensive equities in there, energy, industrials, materials.

You get a little bit of tips. Right now, they're playing a little bit on the short end of the tips curve. You get a little bit of commodities. They're mostly focused on gold.

And so far, year to date, it's beating the S&P 500. It's beating gold itself. It's beating most bond portfolios. So it really has been working. So those kinds of what I would call point solutions for inflation have really come to the fore.

- Yeah, certainly. I mean, when we think about the broad commodities, as well, that consideration for many people who have looked at gold, looked at some of the other precious metals, and tried to figure out, OK, even with the Fed's policy pathway, how that could impact some of those who are just holding gold, at this point in time.

DAVE NADIG: Yeah, and I think it's worth pointing out that we've got gold and oil sitting very high right now. So it's a difficult time to make the case that now is the time you should be piling into these diversifiers as they ratchet up all time highs.

But looking at broad commodities, I like a broad approach that doesn't give you any funky tax treatment at the end of the year, something like Invesco's PDBC, which doesn't give you K-1, gives you broad exposure.

It's done reasonably well in the commodities space. But again, you should be expecting those to be counter correlated. So if the S&P is going to continue its largely earnings driven run, which I think we'll see because margins are still at all time highs in the S&P 500, you're not going to expect those to both go up at the same time.

So should we see a sustained pullback in equities? That's when you'd expect your gold, your commodities position, or even your Bitcoin to be working for you.

- Yeah, Ross, you were just talking about Bitcoin and the exposure there, how some people could still benefit with that?

- Yeah, I mean, at the end of the day like you say, obviously, later this year, we have-- well, pretty soon, the Bitcoin halving. But nonetheless, I think that there are other aspects also look at when we think about other, maybe defensive sectors, health care, et cetera.

In that PPI, are there anything-- is there any exposure to any of those sectors?

DAVE NADIG: No, it's really quite focused on those sort of defensive sectors that are more traditional in terms of things like energy, materials, industrials. And it's hand-picked. This is an actively managed fund.

It's got 35 stocks in it, and then uses ETFs to get things like the broad commodities exposure, or the gold exposure. But I think it's an interesting point. We see a lot of people trying to position around equities.

Remember, that most equities trade on sentiment and flow far more than fundamentals these days. So if everybody thinks that those defensive equities are going to go up, you'll see them move long before the actual inflation is benefiting. You know, historically, what we would expect the good cash flow, the pricing power, the inelasticity of demand.

- You know, it's interesting. I think a lot of us were thrown for a loop for a moment in our planning meeting earlier today because we were talking about, OK, some of the tips that Dave is going to bring forward. It's not just tips and key takeaways, no. It's tips. It's treasury, inflation-protected securities, why?

DAVE NADIG: So treasury-- so the break even on tips, basically, you get paid that inflation uptick on your capital is about 2.4%, 2.5%. I haven't looked in the last hour. And that's pretty good right now.

And we are seeing inflation print higher than. That means that tips look a little bit like a buy. The challenge there is how are rate cuts going to impact that? So your duration positioning in tips, do you want to be really short? Do you want to be 10 years out? I think it's going to have far more short term impact than anything else.