Forget Commodities to Hedge Inflation: Try Dividend ETFs Instead

Record levels of inflation, predicted to be driven higher by the impact of the Russian-Ukraine war, and expectations that the Federal Reserve will increase interest rates for the first time in over three years, have heightened investors’ concerns about the economic landscape.

The Bureau of Labor Statistics' Consumer Price Index (CPI) rose 7.9% in February compared to one year prior, marking the fastest annual jump since 1982, taking out January’s previous 40-year record high rate of 7.5%.

On a month-over-month basis, consumer price increases also accelerated. The CPI rose 0.8% in February after increasing by 0.6% during the prior month.

In periods of inflation, investors tend to flock toward commodities, which began last year at extraordinary lows and still look cheap relative to other financial assets; however, history shows that they could make a big move in either direction, and that commodities’ long-term returns have been poor. 

Over 150 years through last summer, Deutsche Bank calculates, oil returned -0.42% per year after subtracting for inflation; wheat, -1.12%; and copper, -0.56%. That compares with a 6.57% return for U.S. stocks, after inflation and including dividends, Barron’s reports. 

In this environment, a good place to hide is in dividend-oriented companies that are expected to grind through this market turbulence. Equities that pay dividends are typically better-positioned in an inflationary environment than the broader equity market or fixed income investments.

When searching for income-generating investments, ETFs holding dividend stocks have advantages over the traditional fixed income offerings. Dividend stocks provide a fairly reliable source of income plus the possibility of capital appreciation over time. 

As flows into equity income ETFs continue to grow, it is important for investors to differentiate between high-yield funds and dividend-growers — the latter typically signals a product comprising higher quality companies.

Three highly-rated ETFs include the SmartETFs Asia Pacific Dividend Builder ETF (ADIV), the Guinness Atkinson SmartETFs Dividend Builder ETF (DIVS), both of which are managed by Guinness Atkinson Asset Management, and the BlackRock iShares Global 100 ETF (IOO).

For more news, information, and strategy, visit the Dividend Channel.


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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