'Reflation Trade' ETF Ideas

by: Gary Gordon

There isn't going to be a global depression. You can bank on that... literally.

While GM's (NYSE:GM) bailout uncertainty pummeled stocks and commodities on yet another manic Monday, the greater reality is that the U.S. is pumping $2,000,000,000,000 into the credit markets. The U.S. has also allocated enormous sums to the banks via TARP 1.0 and will likely give more via TARP 2.0. What's more, we have one of the largest spending packages in our history AND we have scores of help-the-housing-market projects.

Meanwhile, China has pumped hundreds of billions into its infrastructure. Plus, central banks around the globe have lowered interest rates to multi-decade lows.

When you add it all up, the world will not accept a deflationary depression. It follows that when, not if, economies begin to recover, the only questions left are, "What about skyrocketing prices that we call inflation?" and "How can I profit from the reflationary efforts by governments around the globe?"

Indeed, interest rates will be forced higher. And commodities will climb at an attractive clip, though I personally do not expect "hyper-inflation."

What do I expect? The trend towards energy and materials stocks will likely continue. They've already proved to be the best performers in 2009, excluding tech. (It is true that technology has posted the best numbers due to cash rich balance sheets and historically attractive valuations.)

International sectors 2009 comps

Ironically enough, so-called recession-beaters like Global Healthcare (NYSEARCA:IXJ) and Global Consumer Staples (NYSEARCA:KXI) are having a far tougher time than Global Tech (NYSEARCA:IXN), Global Energy (NYSEARCA:IXC) or Global Materials (NYSEARCA:MXI). The only viable answer for the trend is the belief in a so-called reflation trade.

It follows that Global Financials (NYSEARCA:IXG) may still be ailing, but those who agree with the reflation concept should be looking at IXC and MXI. It may not be a straight line for these natural resources plays, but they seem to be the largest beneficiaries of future inflation.

It's clear that the markets are anticipating that a reflationary portfolio might pay off over the long-term. But what if stocks just don't feel right to you? Aren't there other alternatives?

Take a look at how the "ultimate use" metal is performing. The iPath DJ AIG Copper ETN (JJC) has been one of the most outstanding commodity gainers for 2009 with a 40%+ rally off its lows.

Copper etn jjc

What if you want sure-fire protection against future inflation? What if you're still squeamish about the volatility in commodities and stocks? Then the safest of all investments will be inflation-protected securities.

In the U.S, you have inflation protected securities in the form of TIPS, and they are best represented by the iShares TIPS Bond Fund (NYSEARCA:TIP). This fund has already gained 4% in 2009.

For protection on a global scale, there's the SPDR DB Int'l Government Inflation Protected Fund (NYSEARCA:WIP). It hasn't had quite the run in capital appreciation as its U.S. counterpart; nevertheless, it provides an investor with a monthly income stream at roughly 4% annualized and it diversifies to reduce overall portfolio risk.

WIP international inflation

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