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Best Historic Inflation Hedges

Posted by Vident Financial on 9/14/21 9:00 AM

We've been arguing that America has likely already entered a period of elevated inflation.

 

If this outlook is correct, investors would be wise to investigate which investments act as inflation hedges. Here’s how Investopedia describes inflation hedges:

 

“An inflation hedge is an investment that is considered to protect the decreased purchasing power of a currency that results from the loss of its value due to rising prices either macro-economically or due to inflation. It typically involves investing in an asset that is expected to maintain or increase its value over a specified period of time. Alternatively, the hedge could involve taking a higher position in assets, which may decrease in value less rapidly than the value of the currency.”

 

Recently, economist Dr. Mark Skousen wrote an analysis about inflation hedges, in which he summarized data from Wells Fargo looking at various investment options and their comparative returns during times of high inflation.

 

inflation hedge table

(Source: "What’s the Best Inflation Hedge? Surprise, Surprise — It’s Not Gold or Bitcoin!" by Mark Skousen, 7-1-21, finance.townhall.com)

 

Unfortunately, the Wells Fargo analysis did not appear to include real estate among the asset classes, which we believe is a serious omission given, in what our opinion are, the commonsense arguments for real estate as an inflation hedge. Skousen sums up those arguments below:

 

“Rental properties and single-family homes can hedge, and even profit, from inflation in three ways:


1). Real estate prices can appreciate.
2) Income from rent grows with the Consumer Price Index (CPI).
3) “Depreciating debt” occurs, whereby the value of the real estate holder’s mortgage payments depreciates.”

 

 

So, per the analysis above: commodities have historically been good inflation hedges in general, as have stocks; emerging market stocks generally perform better than other stocks, and stocks better than bonds (with the exception of TIPS, which are a kind of bond which offers special protection against inflation, so you'd expect them to do relatively well under times of high inflation.)

 

Some Vident indices possess characteristics which overlap with this list of historic inflation hedges. For example, VIEQX (Vident International Equity Index) has tended to overweight emerging markets relative to cap-weighted international equity indices. VCUSX (Vident Domestic Equity Index) has tended to overweight small cap stocks (the fifth from the top on the inflation return list above). VUBDX (Vident Core U.S. Bond Index) allows allocations to TIPS, which many diversified bond indices do not. Vident also offers USREX (U.S. Diversified Real Estate Index), but as the analysis above does not account for real estate as an inflation hedge, we'll leave that to our own internal analysis of inflation dynamics of various investment options.

Topics: Economics

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