Commodities, TIPS and cash can partially hedge short-term fluctuations in inflation while equities have consistently outperformed other assets for a longer holding period. Our analysis shows that no single asset constitutes a perfect inflation hedge. Inflation hedge effectiveness depends on the correlation between an asset’s return and inflation, inflation beta sensitivity and the holding period. It is important to take these factors into account before deciding where to invest.
As the global economy emerges from one of the worst shocks since the Great Depression, triggered by the COVID pandemic, investors have once again started to refocus their attention on inflation and its possible trajectory. Recent inflation surprises have only heightened concerns; although, industry commentators generally agree that these surprises are transitory in nature and will only have an ephemeral impact on economic growth.
This view, which State Street Global Advisors also shares, was aptly summarised in the recent Global Market Outlook, in which the authors noted that rising input costs and a strong rebound in global demand have been fuelling inflation. While current spikes should moderate later in the year, inflation is expected to remain at elevated levels over the next two years.1 That being said, the authors also conceded that a key risk to their forecasts is sustained higher inflation. This uncertainty has led some investors to re-evaluate the assets that could help mitigate the potentially negative impact of inflation on investment returns. Inflation is often a key consideration for investors, with the objectives of many investment portfolios directly anchored to inflation rates.
Given the importance of inflation considerations, we have carried out a detailed analysis on how investors can protect against inflation. In this paper, we investigate whether inflation risk can be attenuated through investing in a variety of common, publicly traded investment exposures. Our investigation is built upon the previous work undertaken by researchers at the IMF who utilised inflation beta as the primary statistical measure to appraise the inflation-hedging capabilities of an array of investment exposures.
To extend their work, we have repeated the same analysis using more recent data with a focus on the US, scrutinised the historical performance of these assets under different headline inflationary regimes, and studied whether their performance covaried with expected and unexpected inflation, both of which are estimated from the headline inflation figures via a statistical technique. Finally, we also considered the potential impact on investment exposures from headline inflation shocks, which are defined as a one standard deviation move.
The investment implications of the analysis in the paper are summarised as follows:
SPDR ETF is the exchange traded funds ("ETF") platform of State Street Global Advisors and is comprised of funds that have been authorised by European regulatory authorities as open-ended UCITS investment companies. SPDR ETFs may not be available or suitable for you.
ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETFs net asset value. Brokerage commissions and ETF expenses will reduce returns.
Changes in exchange rates may have an adverse effect on the value, price or income of an investment. Further, there is no guarantee an ETF will achieve its investment objective.
SHARES IN THE FUNDS OF THE SPDR® ETF SICAV, SSGA SPDR ETFS EUROPE I AND SSGA SPDR ETFS EUROPE II PLC MAY NOT BE AVAILABLE FOR OR SUITABLE FOR YOU. THE VIEWS EXPRESSED IN THIS SITE DO NOT CONSTITUTE INVESTMENT ADVICE. INDEPENDENT ADVICE SHOULD BE SOUGHT IN CASES OF DOUBT. NEITHER THE INFORMATION NOR ANY OPINION CONTAINED ON THIS SITE CONSTITUTES A SOLICITATION OR OFFER TO BUY OR SELL SHARES OF THE FUNDS OR ANY OTHER FINANCIAL INSTRUMENT.
Standard & Poor's®, S&P® and SPDR® are registered trademarks of Standard & Poor's Financial Services LLC (S&P); Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC (Dow Jones); and these trademarks have been licensed for use by S&P Dow Jones Indices LLC (SPDJI) and sublicensed for certain purposes by State Street Corporation. State Street Corporation's financial products are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates and third party licensors and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability in relation thereto, including for any errors, omissions, or interruptions of any index.
SPDR ETFs may be offered and sold only in those jurisdictions where authorised, in compliance with applicable regulations.
Information related to Mexico
This information does not constitute and is not intended to constitute marketing or an offer of securities and accordingly should not be construed as such. The Funds referenced herein have not been, and will not be, registered under the Mexican Securities Market Law (Ley del Mercado de Valores) and may not be publicly offered or sold in the United Mexican States. Disclosure documentation related to any of the aforementioned Funds may not be distributed publicly in Mexico and shares of the Funds may not be traded in Mexico.
You should obtain and read a prospectus and KIID relating to the SPDR ETFs prior to investing. Further information and the prospectus/KIID describing the characteristics, costs and risks of SPDR ETFs are available for residents of countries where SPDR ETFs are authorised for sale on the SPDRs website and from your local SSGA office.