7 Best Asset Classes to Hedge Against Inflation

The US Inflation Rate reached 7.48% in January 2021, marking its highest level since “The Great Inflation” of the 1980s. US Core Inflation and Core CPI both topped 6% for the first time since September 1982 as well.



Inflation represents a rise in an economy’s overall average price level and a decline in the purchasing power of that economy’s domestic currency. Rising labor costs and raw material prices are two main drivers of inflation.

It’s important to note that inflation affects more than just the price of consumer goods—nearly every asset class can take a hit from inflation in one shape or form. While rising prices can be a sign of economic growth, translating into higher corporate earnings and elevated stock prices, there is a flip side. As seen historically, rapid inflation prompts central banks to hike interest rates in efforts to control prices. Bond yields rise while prices fall, future corporate earnings are discounted further and equities sell off, and any adjustable rate credit product becomes more expensive.

If inflation sounds spooky—and switching to day-old milk is not your idea of coping with inflation—then you’re in the right place.

Here are seven of the best ways to hedge your portfolio against inflation:

• Ex-US ETFs and Mutual Funds

• “Defensive” Stocks

• Bonds (including TIPS)

• Foreign Currencies

• Cryptocurrencies

• Commodities (including Gold and Precious Metals)

• Real Estate


1. Ex-US ETFs and Mutual Funds

Inflation is typically regarded as a negative for stocks, as it increases companies’ borrowing and production costs (materials, labor), further discounts their future earnings, and ultimately leads to lower expected earnings growth. If US companies’ earnings are expected to shrink, ex-US investments can hedge a predominantly US portfolio and capture potential returns from worldwide markets where inflation may not be as high.

Examples of ex-US ETFs:

Vanguard FTSE All-World ex-US ETF (VEU)

SPDR Portfolio Developed World ex-US ETF (SPDW)



Examples of ex-US Mutual Funds:

Fidelity Global ex US Index (FSGGX)

Vanguard FTSE All-World ex-US Index Admiral (VFWAX)

State Street Global All Cap Equity ex-US Index (SSGVX)

Per the theory of diversification, the less correlated two investments are, the more they can protect investors from downside risk. While diversification is typically regarded amongst asset classes, it also applies geographically—in this case, increasing weights in positions outside of the US.


2. “Defensive” Stocks

Though higher inflation typically leads to Fed rate hikes that can stymie stock market returns, certain sectors act as a hedge since they tend to appreciate in such times. Materials and Utilities are two defensive sectors that investors often rotate into. When the prices of raw materials rise, Materials stocks go right along with them. As for Utilities, the average stock in that sector carries the second-highest dividend and lowest beta of the eleven sectors. Therefore, many Utility stocks act as a sort of bond hybrid, sporting the risk-off elements of fixed income instruments with the ability to generate current income via dividends.




3. Bonds, including TIPS

The Federal Reserve hikes the Fed Funds rate as a means to control inflation, and in turn increases interest rates across all time frames. During inflationary periods, investors might consider adding to their fixed income positions, as higher risk-free returns make bonds more attractive compared to risky assets such as equities. But be aware: timing is everything. Purchasing bonds after rate hikes have been priced in is one thing, but buying them before a rate hike occurs might lead to depreciated values of those bonds.

Treasury yields are typically one of the biggest beneficiaries during rate hikes, as seen most recently in 2016 and early 2022.



Another fixed-income vehicle, Treasury Inflation Protected Securities (TIPS), are like treasury bonds but designed specifically to protect against inflation. Just as treasuries fluctuate based on interest rates, TIPS principals appreciate when inflation rises as measured by the Consumer Price Index. During inflationary periods, TIPS can provide added returns and protection to a portfolio if or when equity prices dive. TIPS are available in 510, and 30-year durations.


4. Foreign Currencies

Inflation not only decreases a currency’s purchasing power domestically, it can also weaken a currency compared to other countries’ tenders. Though a weakened currency can stimulate activity from foreign buyers, holders of that currency are at a disadvantage when purchasing from foreign nations. For example, the US Dollar experienced relative weakness against the PoundCanadian DollarEuro, and Australian Dollar from March 2020 through the first half of 2021, partially due to rising inflation. But then, as inflation rippled its way across the rest of the world, the US Dollar strengthened once again in the back half of the year.



The Japanese Yen has often been regarded as a safe haven for US dollar holders in times of economic uncertainty. Japan’s historically steady economic growth and inflation rate have resulted in tame exchange rate fluctuations, providing a hedge against inflation-induced currency devaluation.




5. Cryptocurrencies

Those who wish to diversify out of fiat currencies entirely might seek alternative stores of value. One emerging asset class is cryptocurrency, including BitcoinEthereum, and Cardano. Though it may be too early to call cryptocurrencies a reliable inflation hedge, their broad appeal as a decentralized store of monetary value is gaining popularity.



US investors can get in on the crypto craze by owning coins directly or buying shares in crypto trusts or ETFs. Some of the ones available on YCharts include Grayscale’s Bitcoin (GBTC), Ethereum (ETHE), and Litecoin (LTCN) trusts, as well as the ProShares Bitcoin Strategy ETF (BITO).

For a further dive into all things crypto, read what Onramp CEO Tyrone Ross has to say on why advisors should think about crypto assets.


6. Gold, Precious Metals, and Commodities

All that glitters is gold, especially during times of inflation

Precious metals such as gold have been historical favorites for hedging against inflation due to their scarcity, tangibility, and historically negative correlation to paper money.



In addition to owning physical gold, investors can consider adding gold miners, ETFs, or even currency-hedged gold funds to their portfolios to “stay golden” through inflation. Some of these plays include SPDR Gold Shares (GLD), iShares Gold Trust (IAU), VanEck Vectors Gold Miners ETF (GDX), and Aberdeen Standard Gold ETF (SGOL).

Other tangible assets include commodities, such as oillumber, and steel, whose prices not only increase with inflation but also act as indicators of both future inflation and economic growth. As the economy expands, the demand for commodities heats up, pushing their prices higher.


7. Real Estate

Like precious metals, real estate is a tangible asset that tends to hold value during prevalent inflation. As prices rise, so do property values and rents, increasing the amount of rental income earned along with the book value of property.

Existing homeowners may actually welcome inflation as it translates to more valuable equity. However, real estate taxes could increase in kind. If you’re considering buying a home for the first time, higher home prices might have you second-guessing that corner lot in the ‘burbs.



Alternatively, the benefits of owning actual real estate can be captured by adding Real Estate Investment Trust (REIT) holdings to a portfolio. REITs typically operate conglomerates of real estate and are investor-owned. Those investors receive distributions on the REIT’s rental income, interest, and property sales. There are hundreds of REIT equities, ETFs, and Mutual Funds available on YCharts in addition to general real estate sector securities such as the SPDR Select Real Estate Sector ETF (XLRE).


The Bottom Line

Whether it’s at the grocery store or out on the road, consumer demand and healthy economic activity (but sometimes money printing and resource scarcity) ignite inflationary effects and send prices higher. Though consumers and investors alike have valid reasons for concern, there are many ways to protect long-term investments against the forces of inflation. From ex-US investing to snapping up gold and property, the ability to hedge your portfolio against inflation should keep you sleeping well at night.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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