4 of the Smartest ETFs to Buy When Inflation Is Running Hot

In September, the inflation rate in the United States rose to 3.7% annualized, the seventh straight month it's been above 3.3%. And it's been above the Fed's 2% target every month since early 2021.

That's helped push long-term Treasury yields up to their highest levels in two decades and extended a bear market in government bonds that goes back roughly five years. Stocks, however, continue to hold up. Strong corporate earnings growth tied to the artificial intelligence (AI) trade is, for now, outweighing the downward pressure from higher rates.

But that probably won't last forever, and we're already seeing some anti-inflation plays doing well. Inflation doesn't impact every asset class the same way; I'd consider these four ETFs for approaching it in different ways.

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Protect your purchasing power without betting on interest rates

The Vanguard Short-Term Inflation-Protected Securities ETF (NASDAQ: VTIP) is perhaps the most direct way to own inflation protection in your portfolio. It invests in securities whose principal value adjusts according to the current level of inflation. As inflation rises, your principal value rises alongside it.

But high inflation usually means higher interest rates. Just because these securities are designed to be inflation-protected, they're not designed to be rate-protected. Long-term TIPS can still experience significant volatility and losses if rates keep moving sharply higher. That's why I like a focus on short-term TIPS. You get the inflation protection while minimizing your interest rate risk.

Own the assets that are causing inflation

The Invesco DB Commodity Index Tracking ETF (NYSEMKT: DBC) is essentially a way to invest in the things driving inflation, namely crude oil. While this is a broad commodity fund, meaning it also invests in agriculture and precious metals, more than 50% of its exposure is to energy products.

Since this fund invests in futures contracts based on oil prices, it's one of the best ways to protect against oil price volatility. Owning commodities in general as a small percentage of a larger diversified portfolio is generally a good idea because of their low correlation with other asset classes.

Buying companies with durable demand

The Vanguard Consumer Staples ETF (NYSEMKT: VDC) isn't a direct inflation hedge. But it invests in the companies that produce products people need to buy regardless of inflation or economic conditions. Think of things like household goods, food, beverages, and the big retail stores that sell them.

If you own stocks during a prolonged period of high inflation and high interest rates, the odds are good that you'll eventually see their prices fall. But companies that manufacture and sell the things that consumers need every day tend to hold up better. That's not to say that consumer staples stocks will generate positive returns. But they do help limit some of the downside risks associated with investing in tech, growth, or AI stocks.

Focus on high-yielding, high-quality dividend stocks

The Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD) is a good way to invest in high-quality, durable dividend-paying companies. If inflation begins to slow the global economy, this portfolio holds many companies positioned to withstand a downturn.

Persistently high inflation can be particularly damaging to companies dependent on rapid growth and with high debt levels on their balance sheets. That's why owning high-quality stocks during challenging times (or any time, really) is so important. Like consumer staples, they can enjoy durable demand, maintain competitive advantages, and generate substantial cash flow, which often makes them better performers when high inflation is affecting the economy.

David Dierking has positions in Schwab U.S. Dividend Equity ETF. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.