ETF Strategies to Cope With Deflation

Includes: DTN, EFZ, SH, SHY
by: Tom Lydon

Investors are on high alert these days, but few are sure for what: inflation, deflation or stagflation. Deflation might be the more pressing concern at the moment, and we’ve got some ETF strategies you can use to cope.

These days, everything from clothing to groceries are cheaper than they were one year ago, reports The Wall Street Journal. Apparently those days of year-over-year inflation have decided to take a break across the board, putting us on the brink of deflation.

Deflation is not exactly bad; when it’s simply the result of rising productivity, it’s a good thing. If it’s a sign of a deeper economic slump, the next thing to rise will be interest rates.

Ultimately, though deflation is a deleterious cycle that can cause banks to stop lending, businesses to halt expansion, wages to fall and consumers to reduce spending – all serving to drive prices even further downward. The CPI, or the Consumer Price Index, is a good indicator for deflation.

To cope with deflation, investors should look to short-term investment strategies, such as short-term certificates of deposit or money-market funds. If you’ve got a 10-year time frame, the technology sector is also an appealing place to look, since companies often boost productivity through the use of technology.

Short-term government bonds may also do well, such as the iShares Barclays 1-3 Year Treasury (NYSEARCA:SHY).

Don Dion for The Street says that deflation is not a strategy and should not be approached as one. The best strategy for most investors is to hold a diversified portfolio of assets. Within that diversified portfolio, small changes in allocations and holdings can make a big difference.

If your risk appetite is healthy, he suggests short funds such as the ProShares Short S&P 500 (NYSEARCA:SH) or the ProShares Short MSCI EAFE (NYSEARCA:EFZ). If the economy is recovering in a deflationary period, a dividend fund such as the WisdomTree Dividend Top 100 (NYSEARCA:DTN) may do well.

Tisha Guerrero contributed to this article.

Disclosure: None