3 Inflation-Fighting ETFs

Daniel Sotiroff: Inflation has been ticking higher over the past two years. The Consumer Price Index grew by 7.2% in 2021 and another 6.4% in 2022. Those rising costs can be a short-term headwind for stocks and bonds, but some are positioned to cope with inflationary pressures better than others.

3 Inflation-Fighting ETFs

1. Vanguard Short-Term Inflation Protected Securities ETF VTIP
2. Avantis Inflation Focused ETF AVIE
3. Vanguard Value ETF VTV

Gold-rated Vanguard Short-Term Inflation Protected Securities ETF, ticker VTIP—or “V-TIP”—is the first ETF for today. As its name implies, VTIP tracks an index of Treasury Inflation Protected Securities with less than five years remaining to maturity.

The U.S. Treasury backs these bonds with the full faith and credit of the U.S. government, so they face little, if any, default risk. Their inflation fighting power comes from their unique connection to the Consumer Price Index. The face value of these bonds, and their corresponding coupon payments, are designed to increase as inflation creeps higher.

The downside is that these bonds aren’t insulated from rising interest rates. The Federal Reserve tends to raise interest rates when inflation runs hot, which pushes bond prices lower. VTIP shields itself from some of that risk by sticking to bonds with five years or less remaining to maturity. While it’s not completely immune from the impact of rising rates, it should fare better than others in the inflation-protected bond category during strong inflationary bouts.

Avantis Inflation Focused ETF is the second ETF for today. Trading under the ticker AVIE, it’s a stock-focused ETF that’s built around a handful of sectors best positioned to benefit from rising prices, including basic materials, energy, consumer staples, and healthcare. Companies operating in these industries are much closer to the raw materials that typically drive inflation, so they can benefit by passing along higher prices to their customers.

Despite stronger positions in these sectors, AVIE held shares in about 350 companies at the end of March, so risks specific to a given company are relatively small. Avantis also charges a relatively low fee for these inflation-fighting powers. AVIE’s net expense ratio lands at just 25 basis points per year.

Gold-rated Vanguard Value ETF, commonly known by its ticker VTV, also has the potential to serve up some inflation protection through similar risk exposures.

Like AVIE, VTV leans toward segments of the market that are best positioned to benefit from the rising costs of raw materials, including companies operating in the energy, consumer staples, and healthcare sectors. But its emphasis on these segments is more modest than AVIE, and it spreads the rest of its portfolio across a wide range of stocks from all industries trading at cheaper multiples.

VTV’s inflation protection won’t likely measure up to that from AVIE over the short run. It’s less dependent on cyclical segments of the market that offer the biggest punch. But its broader portfolio it should hold up better over the long run, giving it a far better chance to compound its edge over rising prices.

VTV’s ultra-low fee is another considerable advantage over its peers in the large-value category. Vanguard charges just 4 basis points per year for this ETF, which sets it up for great long-term performance, regardless of the direction that inflation travels.

Watch “3 Great Emerging-Markets ETFs” for more from Daniel Sotiroff.