How to Beat Inflation

What a strange week! A Friday holiday, which is rare and not even the day (the 4th of July is tomorrow, but the stock market is closed today), a big wedding (I wasn't invited, lol) and a 250th birthday celebration of the USA. I still remember very well the 200th, when I was 11 years old. Last week, I discussed the changes ahead with my coverage of the ETFs, and I did detail those changes in the June Review.

A Look at the Market

The State Street SPDR S&P 500 ETF (SPY) advanced during the short trading week, beginning with strength but then falling in the past two days. It has increased in price by 9.2% and has returned 9.8% with dividends. Bonds remain under pressure, with iShares Core US Aggregate Bond ETF (AGG) now returning just 0.7% with dividends included, which is below the return on cash.

Today, I want to discuss inflation-protection. In the very short-term, concern has likely dropped due to the end of the Iran war and a weak employment month. In my view, the war is not over necessarily, and, while the economy could go into recession, we have continuing inflationary pressures due to the massive federal debt.

Most investors think that the best protection against inflation (and dollar weakness) is gold or other precious metals. Well, adding to what I said above about inflation-protection losing its luster, check out the year-to-date action for gold, silver and miners:

All are DOWN. I am not surprised, as I have maintained a Strong Sell at Seeking Alpha on VanEck Gold Miners ETF (GDX). To get a better perspective, let's look at the action since the end of 2022, along with the S&P 500 and the Russell 2000:

Despite the big pullback recently, each of these ETFs has outpaced the S&P 500 since the end of 2022.

This is not new: I like Treasury Inflation-Protected Securities (TIPS)! The best ETF for the sector due to its size, its liquidity, its broad coverage of the universe by maturity and its excellent ticker is iShares TIPS Bond ETF (TIP). It has returned only 14% since the end of 2022. This is below cash!

Now, looking at TIP plus the two other ETFs that I follow closely, Vanguard Short-Term Inflation-Protected Securities ETF (VTIP) and PIMCO 15+ Year US TIPS Index ETF (LTPZ), over the period since the end of 2019 (so, this decade and also pre-pandemic) things have gone from very good to not-so-great:

First, SPY has returned 154% over this time-period. Here are my observations on the TIPS ETFs:

• Only VTIP has outpaced cash

• TIP, worse than cash, has outpaced a similar regular Treasury ETF that I follow (and own in the model portfolio)

• LTPZ has outpaced the very popular TLT in return but has actually lost investors' money

Stocks have soared, and TIPS ETFs have been better than Treasury ETFs of similar maturity on a total return basis. Total return is what counts, but I get the feeling that many look at the price action rather than the total return action. Here is the price action over this same period:

Over the past six-plus years, each of these TIPS ETFs has outpaced similar maturity Treasury ETFs, and only VTIP has increased in price. The Aggregate bond index has dropped in price by 12.3% during this time-frame, and its total return has been 6.1%.

Now, looking at the action since the end of Q1, it's evident that TIPS are not doing well in return:

Two of these three TIPS ETFs are returning less than cash! Of course, they are all lagging SPY, which has returned 14.8%. While LTPZ has outpaced TLT over the last three months and two days. Here are my observations:

• While LTPZ has outpaced TLT, it is up only slightly more than AGG, which has returned 0.8%

• This has happened as the yield curve has flattened

• Each of the TIPS ETFs are doing better than the similar maturity Treasury ETFs

• The precious metals have really been crushed during this time period, as has been Bitcoin

  
  

Here is the year-to-date action for the TIPS ETFs and the precious metals ETFs and iShares Bitcoin ETF (IBIT):

All of these are doing worse than cash, and only VTIP and TIP are also positive among these ETFs. I don't have AGG on there, but it has returned a bit less than VTIP and TIP at 0.7%. I like LTPZ the most, but I do like all of these ETFs focused on TIPS. Of course, I do own a lot! They are part of the 60/40 index, though a small part. I don't like the precious metals, but I do like IBIT (and Bitcoin) as a potential inflation-protection mechanism.

ETF Model Portfolio Update

This ETF model portfolio, which is measured against 60% SPY and 40% AGG, is up relative to its benchmark. This week, I did several trades, which were published on here instead of on my Seeking Alpha blog. For those who would like real-time alerts (free of charge for now), just subscribe to the blog.

I posted no articles this week at Seeking Alpha about ETFs.

I wrote about two stocks at Seeking Alpha:

• Expand Energy Has A Strong Balance Sheet And A Low Valuation

• Why I Am Upgrading Village Farms

Going into the week, my model portfolio equity exposure totaled 28.6%, spread out across three ETFs. Above, I discussed how strange this week was, but I left one thing out: I executed only one trade! Here is what I did this week:

• Monday: I exited the recently purchased Invesco S&P 500 Equal Weight ETF (RSP) and added to ProShares S&P MidCap 400 Dividend Aristocrats ETF

Here is the current model portfolio, which now has 28.2% equity exposure in two ETFs and fixed income exposure in three ETFs that totals 56.1%:

I have been wrong this year, at least so far, as stocks keep rallying. The rally has been until Friday four weeks ago, when they had their worst day of the year. Since then, the S&P 500 has not made a new high, though it sure tried. Small-caps did again make a new high this week. Despite being underweight stocks all year, my return relative to the 60/40 index is higher by about 4.4% in just over six months. In fact, while the S&P 500 rose slightly this week, and the Aggregate Bond Index fell slightly, this model portfolio fell just slightly during the week.

The year-to-date strong relative performance is not due to superior returns on my current equity ETFs. My TIPS ETFs have done okay relative to AGG, but they aren't exactly boosting the return. VGSH isn't helping too much either. So, what has it been? I have had positive returns from three ETFs, two of which I no longer hold and one of which is down a lot year-to-date that I just repurchased recently, and there has been some good trading.

How Can I Help You?

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My ETF articles at Seeking Alpha, written under the alias The Intelligent ETF Investor, share a lot of my ideas.