Here’s what Vanguard has found to be the most powerful asset class for fighting inflation
Not all inflation hedges are created the same.
Investors have certainly flocked to Inflation-Protected Treasuries, or TIPS, with the 10-year TIPS yield near a record low of -1.08% on Monday. But according to research by index fund giant Vanguard, the unexpected inflation beta is around 1. That is, a 1% rise in unexpected inflation would produce a 1% rise in the value of TIPS.
The hedging power against commodity inflation, on the other hand, is much stronger, and has been for some time. Over the past decade, the beta of commodity inflation has fluctuated between 7 and 9, which means that an unexpected 1% rise in inflation would lead to a 7-9% rise in commodities.
In recent times, stocks have been a better hedge against inflation, although they are still not as good as commodities. The Russell 3000’s inflation beta is now positive – unlike in the 90s – although it has declined in recent years. Vanguard research notes that commodity-related sectors such as energy and materials now account for a smaller share of the equity market than before, while tech and consumer discretionary sectors ineffective against the market. inflation are more important.
And the worst inflation hedge is bonds, as rising interest rates erode their value.
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