2 of the Best ETFs to Buy When Inflation Is Running Hot

Inflation rates had been trending lower at the start of the year, with the Consumer Price Index (CPI) at around 2.4% in February. Then the war in Iran started and prices shot higher, with the CPI surging to 4.2% in May. The latest CPI numbers show an inflation rate of 3.4% in August, and with gas prices still rising, inflation is likely to remain elevated.

Not only has it led to an interest rate increase, with more potentially on the way, but it has forced many investors to rethink the portfolio strategies they established at the start of the year. Rising inflation has slowed economic growth and been a drag on corporate earnings over the years.

But there are some investments that perform well in cycles with rising inflation, including these two exchange-traded funds (ETFs).

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1. Avantis Inflation Focused Equity ETF

The Avantis Inflation Focused ETF (NYSEMKT: AVIE) launched in 2022 -- when the inflation rate was 8.2% -- to provide an investment that would outperform when inflation rises.

This actively managed fund does this by investing in sectors and industries that historically have correlated with rising inflation. Within that universe, the portfolio managers seek out stocks at attractive valuations with strong earnings characteristics.

Rates started trending steadily down after the Avantis ETF launched in 2022. However, in 2026, as inflation began ticking back up, it has outperformed the S&P 500, up about 19% year to date.

The portfolio holds about 364 stocks, with energy and healthcare each accounting for 29% of holdings. Consumer staples are next at 17%, followed by financials at 16%. The top three holdings are Berkshire Hathaway, ExxonMobil, and Eli Lilly.

The ETF underperformed over the course of the bull market, with a three-year average annualized return of about 13%, with dividends reinvested, compared to the S&P 500's 23% average annualized three-year return.

2. VanEck Real Assets ETF

The VanEck Real Assets ETF (NYSEMKT: RAAX) is another fund that is built for periods of rising inflation. It is also actively managed, and it invests in stocks and ETFs that focus on real assets, like precious metals, natural resources, and commodities, that tend to perform well when inflation rises.

The fund proved its worth during 2022 when inflation rates skyrocketed to over 9%. That year, the ETF returned about 1%, far outpacing the S&P 500 and the Nasdaq Composite, which were down 19% and 33%, respectively.

It has performed well this year, too, up 16% year to date, beating the S&P 500 and on par with the Nasdaq. It has also had strong longer-term returns, with average annualized returns of 19% over the past three years and 14% over the past five years.

The fund holds about 119 stocks and ETFs, with its largest holding being another VanEck ETF, the VanEck Commodity Strategy ETF (NYSEMKT: PIT). The Commodity Strategy ETF invests in exchange-traded commodity futures contracts within the energy, precious metals, industrial metals, agriculture, and livestock sectors. These are areas of the market that tend to perform well when inflation is heading north.

Its top stock holdings are the Williams Companies, which develops natural gas pipelines; Targa Resources, a gas and oil infrastructure company; and Kinder Morgan, another pipeline company.

As their track records show, these two ETFs are not meant to outperform during bull markets; rather, they are designed to produce market-beating returns when inflation is rising and broader markets are trending lower. However, the longer-term returns are strong as well, and very competitive with the major benchmarks. So, that combination of solid long-term returns with performance that zigs when the market zags makes these two ETFs great diversifiers.

Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway, Eli Lilly, and Kinder Morgan. The Motley Fool has a disclosure policy.