I'm compiling a list of potential US stagflation, inflation, and weakening dollar hedges, with notes on why each would help protect against inflation. This is an incomplete list, and the example investments are starter ideas and focused on ETFs.
Are there others you would add to this list?
|Investment|Example Investments|Notes|
|:-|:-|:-|
|Investments in assets outside US.|VXUS or VEU or VT similar|US stagnation would drive a weakening dollar. Foreign equities, probably those in whatever currency emerged from the vacuum of dollar flight, would likely be the best performing asset class.|
|US Companies|VTI|40% of revenues for VTI companies come from outside the US. VTI provides significant international diversity if the dollar weakens.|
|Small cap value stocks|DFSV or AVUV or AVDV|Small cap value stocks performed well from 1973 to 1982 (the Great Inflation). Not part of an inflation hedge per se but cheaper relative to growth stocks. Could use AVDV to combine assets outside the US with small cap value.|
|TIPS|VTIP or buy directly|TIPS outperform long-term bonds in high inflation|
|Inflation-targeted ETFs|IVOL, FCPI, INFL|ETFs specifically targeted to inflation|
|REITs|VNQ or SCHH or O or REZ|REITs perform poorly when interest rates rise, so if rates rise during inflation, REITs may not perform as well.|
|Real Estate|Buy a rental or building|Leverage, concentration risk, liquidity risk, not a passive investment. Income taxed as ordinary income. Focus on residential properties in supply constrained markets where there is a housing shortage. Avoid commercial real estate in stagflation.|
|Commodities|VCMDX|In the 1970s, gold went from $35 an ounce at the beginning of the decade to as high as $850 by 1980. If there is aggressive QE / trade partners dumping bonds or moving away from the dollars then gold could spike.|
|Bitcoin|FBTC|There’s speculation that the recent popularity of Bitcoin and other digital assets has siphoned off investors’ money that would otherwise have gone to gold. So perhaps Bitcoin moves with gold.|
|Energy|VDE or XLE|Energy ETFs serve as a direct hedge against inflation because rising energy costs drive up broader consumer prices. Energy companies have good pricing power.|
|Mining|XME, GDX, PICK|Mining company investments as leveraged plays on raw commodities, offering growth potential during inflation but carrying higher operational and equity risks than directly purchasing commodities.|
|Infrastructure ETFs|IFRA, TOLL, PAVE (International), or IGF, VPU|Toll roads, pipelines, ports, cell towers, electricity networks, etc. Revenues are contractually linked to inflation.|
|Healthcare|IXJ (also some in IYK)|Healthcare has high pricing power.|
|Consumer Staples|XLP or IYK|Consumer staples companies retain high pricing power and relatively low capital costs|
|Berkshire Hathaway|BRK.B|Berkshire Hathaway is concerned about stagflation and performed well in past periods of stagflation|
|Companies with low debt|QUAL or AVUQ|Companies with low leverage do better during high inflation.|
And here is a very incomplete list of investments that perform poorly during inflation and a declining dollar:
|Investment|Notes|
|:-|:-|
|Growth Stocks and Growth ETFs|Growth stocks, especially for companies with high capital costs, spend money funded at high interest rates.|
|Housing starts|Housing starts decline during inflation due to high interest rates|
|Companies with performance driven by discretionary purchases|Travel, cars, clothing, luxury goods, fine dining, entertainment, high-end electronics, etc.|
|Long-term bonds|When interest rates eventually rise, existing long-term bond prices fall, causing capital losses for investors who sell before maturity.|
|Cash|Holding excess cash during inflation reduces your purchasing power because rising prices decrease the real value of your money.|
|Highly leveraged companies|Too much debt needing to be refinanced at high interest rates. This includes companies that are capital intensive.|