Inflation-Beating ETFs: How they really performed in 2022

Equities

People often parrot that "stocks beat inflation," and yes, it's true that over the long term, they do. However, in the short-term, they don't, and can tank pretty hard due to market or idiosyncratic risks. It's hard to develop reliable profit expectations from stocks when their volatility is affected by so many variables outside of inflation. 

Case in point, consider the Horizons Kinetics Inflation Beneficiaries ETF (INFL). This ETF is actively managed and seeks to beat inflation by investing in global equities that benefit from rising prices in real assets (commodities, real estate, etc.) or those that can pass rising costs onto consumers, so revenues rise alongside expenses (thus protecting their margins). 

It seems to have done its job…somewhat. Year-to-date (as of July 6th), INFL is down just -10.54% vs -19.77% for the S&P 500. The problem is you could have achieved roughly the same results for a lower cost with passive index funds that track the consumer staples or energy sectors. INFL costs a hefty 0.85% expense ratio, whereas Select Sector ETFs from State Street don't exceed 0.10%. 

Commodities

Commodities are usually a so-so investment. This asset class tends to provide a low to negative correlation with stocks and bonds along with high volatility, which makes it a good diversifier according to Modern Portfolio Theory. However, commodities funds suffer from numerous drawbacks, including contango, Schedule K-1 forms, and high expense ratios. Some more actively managed funds try to mitigate this by using a different legal structure or picking futures contracts in backwardation. 

Nonetheless, this year has been a fantastic one for commodity bulls. Year-to-date, the benchmark Invesco DB Commodity Index Tracking Fund (DBC) is up 17.93%. Earlier this month it was up higher, but because oil comprises roughly half the ETF, the current downturn in energy has impacted it somewhat. Still, for exposure to a broad basket of 14 commodities including energy, grains, and precious metals, DBC is hard to beat.

We can't discuss commodities without mentioning the often-touted inflation protection of gold. We hear it all the time – gold is a store of value, it beats inflation. Yes, over the very long term (think 100+ years), it does. In the short term? Gold is very volatile and can lose its value quickly. Year-to-date, the SPDR Gold Shares ETF (GLD) has traded more or less flat to end at -3.68%. It's certainly performed better than equities and bonds, but not as good as a broad basket of commodities.  

Treasury-Inflation Protected Securities (TIPS) 

TIPS are U.S. government bonds indexed against inflation. Unlike I-Bonds, as inflation rises, the principle of TIPS is adjusted higher over time. This increases the bond’s coupon, as the interest rate is being applied to a higher value. Theoretically, TIPs should offer pretty good inflation protection. The problem is, at the end of the day, they’re still bonds. 

Being bonds, TIPS have duration, a measure of their price sensitivity to changes in interest rates, with the two being inversely related. For example, if rates are anticipated to increase by 1%, a TIPS with a duration of seven years is expected to lose about 7% of its value and vice-versa if rates fall. All things being equal, TIPS really only protect against sudden, unexpected inflation. 

This is a problem. Interest rates tend to rise when inflation does. Rate increases are the primary monetary policy tool the Federal Reserve enacts to curb inflation. The recent 75 basis point hike is a prime example. Year-to-date, after a series of rate hikes, the iShares TIPS Bond ETF (TIP) is down 11.40%. Long-term TIPs suffered even worse, while short-term TIPS suffered less.