International, Domestic, Stocks, Bonds, Commodities: Comparing Inflation Hedges

Posted by Vident Financial on 10/26/21 9:30 AM

Last time, we set up an historical analysis about which indices had done well during high (and low) inflation periods. We divided all the available data (which meant time periods where we had both quarterly inflation data and quarterly index performance data overlapping with one another) into the periods with the highest fifth and the lowest fifth, and then looked at how 26 different indices performed during high inflation times (the purple bars) and the low inflation times (gray bars).

High and Low Inflation, All Index Returns-1

(Source: Bloomberg, St. Louis Federal Reserve, Bowyer Research)


Here’s a complete list of the indices represented in the above chart:

  1. Morningstar US Energy Sector
  2. Morningstar US Basic Materials Sector
  3. MSCI Emerging Markets Index (USD)
  4. Return Russell 2000® Growth Index
  5. Morningstar US Mid Growth Index
  6. Morningstar US Small Growth Index
  7. Russell Midcap® Index
  8. Morningstar Gbl Mkts xUS PR USD
  9. Morningstar US Small Cap PR USD
  10. Morningstar US Mid Cap PR USD
  11. Morningstar DM xUS PR USD
  12. Morningstar US Growth PR USD
  13. Russell 2000® Value
  14. Morningstar US Small Val PR USD
  15. Morningstar US Mid Val PR USD
  16. Morningstar US Large Growth PR USD
  17. S&P 500 Growth Index
  18. Morningstar US Large-Mid Value TR USD
  19. Copper Price Quarterly Change*
  20. Morningstar US Value TR USD
  21. Morningstar US Large Cap PR USD
  22. Morningstar US Large Value PR USD
  23. USREX - U.S. Diversified Real Estate IndexTM
  24. Vident Core U.S. Bond IndexTM
  25. Bloomberg US Agg Total Return Value Unhedged USD
  26. FTSE US Broad Investment-Grade Bond Index (USBIG®)

Let's zoom in and look at some of the indices in various groupings so that we can compare various characteristics, such as asset class (stock, commodity, real estate, bonds); cap size (large, mid, small); style box (growth, value); and national status/domicile (Global, Developed Market, United States, Emerging Market).


First, we'll look at asset classes, since they give us a widely dispersed return divergence in this analysis:

Asset Class, High Inflation-1

(Source: Bloomberg, St. Louis Federal Reserve, Bowyer Research)

For energy commodities, we used a broad-based energy company index. For industrial commodities, we used a broad-based index of material companies. In one case we created our own index, which is based simply on the price-per-ton of copper in global markets in dollars. For a broad base of United States-based large companies, we used the S&P 500 Growth Total Return index; for real estate we used the USREX - U.S. Diversified Real Estate IndexTM; for bonds, we used the Vident Core U.S. Bond IndexTM, as well as the FTSE US Broad Investment-Grade Bond Index (USBIG®).


In very general terms, energy and material indices performed relatively well during inflationary periods; global performed almost as relatively well. Bonds performed fairly poorly by comparison, and real estate acted as a sort of “middle” category, which tended to perform between stock and bond classes.


But what if you aren't in a high inflation period? What if you're in the bottom quintile of inflationary periods? What does the average return look like for those indices?


It looks like the gray bars below:

Asset Class, High and Low Inflation-1

(Source: Bloomberg, St. Louis Federal Reserve, Bowyer Research)

In general, the performance during low inflation periods was kind of a mirror image of the high inflation periods. Admittedly, it's more a fun house mirror image, not a perfect symmetry -- but in general, it looks like the indices that you wanted to hold when inflation was high were not as much fun when inflation was low.


Next time, let's look at the world of equity, or stocks: the big ones and the little ones and the expensive ones and the cheap ones.


*Created solely for this illustration, represents the price-per-ton of copper in global markets in dollars. This is not an established index.

Topics: inflation hedges

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