If you measure inflation by the consumer price index [CPI] that is supplied to the public by the Bureau of Labor Statistics [BLS] you already know that it reported prices were unchanged the last two months. Later this week the February CPI is due to show an increase of 0.5%, according to estimates. The large majority of the increase will come from a recent increase in the price of gasoline.
The CPI in January showed prices were higher by 1.6% versus last year. As far as the Fed and government is concerned, any number under 2.0% is acceptable. When food and energy are removed you are left with the core CPI, which came in with a 1.9% increase in prices from one year earlier.
Overall inflation is not a concern for most government officials and even a large amount of investors. I am not a conspiracy theorist, however I believe inflation is a much larger issue than the CPI numbers portrays.
As a consumer it is not difficult to determine prices are on the rise. Whether it is filling up your grocery basket, buying clothes, or filling up your gas tank, prices are on the rise over the last few years. At the same time the amount of money being printed in the U.S. is increasing and with more cash in circulation it will lead to an inflationary environment.
Investors attempting to position themselves today for what could be a spike in inflation in the coming years should consider the three ETFs below.
PowerShares Senior Loan Portfolio ETF (BKLN) is made up of a basket of loans that are offered by banks to companies that are often rated below investment grade. Because the ETF is involved in below investment grade offerings it allows for an above-average dividend yield of 3.9%. What makes this ETF attractive is the fact its holdings have floating rates, which translates to its rates increasing with overall interest rates.
When inflation increases and becomes an issue it will more than likely be associated with rising interest rates. An increase in interest rates will lower bond prices as current low-yield investments become less attractive. We own BKLN for clients and believe it is still a solid buy at current levels.
iShares S&P Global Timber & Forestry ETF (WOOD) is an interesting play because it has done well during low inflation (hitting a new 52-week high) and could be a big winner when inflation begins to surge. Historically the timber and land stocks will outperform during inflationary times. And on top of that the stocks that make up the ETF will also benefit from a robust global economic environment and a strong domestic housing market.
A little less than half of the portfolio is based in the U.S. and 55% of the 26 stocks are in the paper and forestry sector. The yield on the ETF is 2.1%, not a swaying factor, but still higher than the 10-year Treasury.
Guggenheim ABC High Dividend ETF (ABCS) is a play on commodities and income. The ETF invests in 30 of the highest-yielding stocks from a trio of commodity-based countries: Australia, Brazil, and Canada [ABC]. The fact the ETF invests in countries that rely heavily on commodities for their economy it should do well as inflation increases. Historically commodities will outperform during inflationary periods.
On top of the inflation hedge is the current 6.5% dividend yield that becomes even more important as interest rates being to increase. The ETF is currently invested heavily in Brazil (52%) and that is one reason the chart is lagging its peers. Over the long term I believe in Brazil and with the high yield I am willing to be patient with the ETF.
Many will argue with me that inflation is not an issue today and will not be for many years. They may be true, history shows that when a country prints as much money as the U.S. has and artificially keeps interest rates near lows for years that the end result will be inflation. I am playing the odds that inflation will be a major issue in the years ahead and the three ETFs mentioned above should be able to hedge against such a scenario.
Disclosure: I am long BKLN.