Inflation has skyrocketed in 2022. Meanwhile, ongoing supply-chain challenges, labor shortages, and higher commodity prices aided by the Russia/Ukraine conflict suggest that inflationary pressure could persist for the foreseeable future.
While investing in certain stocks could be used to beat inflation, the current macro and geopolitical environment make investing in individual stocks difficult. Against this backdrop, investing in an exchange-traded fund (ETF) might be more prudent.
An ETF is a basket of stocks, bonds, and other securities that tracks an underlying benchmark and trades on the exchange. In simple terms, ETFs provide exposure to various securities and diversify risk. Furthermore, there are multiple types of ETFs. Some of the popular ones include Index ETFs and sector or industry-specific ETFs.
Thus, instead of investing in individual stocks, let’s look at two ETFs that could help shield your portfolio against inflation.
Invesco DB Commodity Index Tracking Fund (DBC)
Investment Type: Commodity Futures
Market cap: $4.44 billion
Expense Ratio: 0.87%
52-Week Range: $17.55 – $28.75
During times of inflation, commodities offer diversification to one’s portfolio. Invesco DB Commodity Index Tracking Fund is a convenient and cost-effective (low expense ratio of 0.87%) way to hedge against rising commodity costs.
The fund trades futures contracts on the top 14 heavily traded physical commodities, including Brent Crude, Natural Gas, Gold, Silver, Aluminum, corn, and others. DBC tracks the DBIQ Optimum Yield Diversified Commodity Index Excess Return.
Given the rise in commodity prices, DBC outperformed the broader equity market and delivered an exceptional gain of over 51% in the past year.
Vanguard Mega Cap Growth ETF (MGK)
Investment Type: Large Cap Growth Stocks
Market Cap: $11.78 billion
Expense Ratio: 0.07%
52-Week Range: $206.57 – $266.44
Instead of direct exposure to commodities, investors with long-term investment horizons could consider Vanguard Mega Cap Growth ETF. Historically, equities have delivered solid returns and are one of the best asset classes to beat inflation over the long term.
However, rather than concentrating your portfolio on a few stocks, Vanguard Mega Cap Growth ETF provides exposure to large-cap growth stocks in the U.S. Further, its expense ratio is very low. The fund tracks the CRSP US Mega Cap Growth Index, and its top holdings include Apple, Microsoft, Amazon, Alphabet, and Tesla.
Though the fund has reversed a portion of its gains over the past year, these large-cap stocks have strong potential for growth and have a higher probability of beating the broader market in the long run.
Bottom Line
These funds provide exposure to various stocks, commodities, and securities, thus adding diversification and lowering concentration risk in your portfolio. Further, the expense ratio remains low, which is positive. However, like all asset classes, risk is an inherent part of investing in ETFs.
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