The 5 best mutual funds to fight inflation
IInflation is here and it is unlikely to go away anytime soon. Fortunately, there are plenty of options available to investors looking to push back rising prices, including several mutual funds that should do well against inflation.
The May consumer price index was a wake-up call. Consumer prices rose 5% annually for the month – from a robust 4.2% in April and the fastest growth since August 2008. And while the Federal Reserve continues to insist that many inflationary pressures are temporary, it recently raised its inflation expectations nonetheless not only this year, but also in 2022 and 2023.
If the economy heats up, investors expect the Federal Reserve to curb inflation with higher interest rates. This puts pressure not only on current investor bond holdings, but also on stocks as corporate borrowing becomes more expensive.
Fortunately, mutual funds can help you contain inflation through a number of different strategies. The best inflation mutual funds invest in a wide range of assets, from inflation-protected treasury securities (TIPS) to commodities to real estate and more.
Here are five of the best mutual funds for protecting against inflation.
Returns and data are as of June 17th unless otherwise stated and are recorded for the share class with the lowest required initial investment – typically the investor share class or the A share class. By hiring an investment advisor or online broker, you may be able to buy lower-priced share classes of some of these funds. The dividend yields of equity funds represent the trailing 12 month yield. SEC returns reflect the interest earned after subtracting fund costs for the past 30 day period and are a standard measure for bond and preferred stock funds.
Vanguard Treasury inflation-protected securities investor
- Fund category: Inflation-protected bond
- Assets Under Management: $ 36.3 billion
- SEC yield: -1.8%
- Costs: 0.20% or $ 20 for every $ 10,000 invested
As the name suggests, it is Vanguard Treasury inflation-protected securities investor (VIPSX, $ 14.53) is an easy way to reduce inflation.
VIPSX holds TIPS, which are inflation-linked bonds. This means that the net present value of these bonds adjusts to movements in inflation – so when inflation rises, so does the net present value of the TIPS.
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While TIPS might perform better in inflationary phases, they still harbor an interest rate risk. In particular, if interest rates rise during a period of no or low inflation, the market value of TIPS could fall, which in turn would lower the net asset value of a fund like VIPSX.
Still, VIPSX is one of the best mutual funds for inflation. It’s right for investors looking to diversify their bond holdings, usually to complement a core bond that may not do as well in an inflationary environment.
Note: Investors who can invest at least $ 50,000 can get the same exposure at a lower expense ratio (0.10%) through Vanguard’s Admiral stock (VAIPX).
Learn more about VIPSX on the Vanguard provider page.
Dodge & Cox Stock
- Fund category: Great value
- Assets Under Management: $ 89.0 billion
- Dividend yield: 1.4%
- Costs: 0.52%
Dodge & Cox Stock (DODGX, $ 237.62) not only stands out as one of the best mutual funds for inflation – it’s also one of Kiplinger’s most popular funds, hence its inclusion in Kiplinger 25.
Value stocks tend to outperform growth stocks in times of rising inflation and rising interest rates for a number of reasons.
For one thing, value stocks generally have strong current cash flows that are expected to slow over time, while growth stocks currently have little to no cash flow but are expected to increase. However, inflation erodes with this expectation for future cash flows, hurting growth stock prices today.
Also, some value stocks are built simply to take advantage of higher interest rates. Take financial stocks, for example, which when interest rates rise can widen the spread between their loan rates even if they continue to pay customers low interest rates on their deposit accounts. Financial stocks make up more than a quarter of the DODGX portfolio, including top 3 holdings Wells Fargo (WFC), Capital One Financial (COF) and Charles Schwab (SCHW).
With a team management approach (average tenure with the company is 12.4 years), performance consistently above category average, and a low expense ratio of just 0.52%, it’s easy to see why Dodge & Cox Stock does so among its peers is great.
Find out more about DODGX on the Dodge & Cox supplier website.
Parametric commodity strategy investor
- Fund category: Broad basket of raw materials
- Assets Under Management: $ 1.1 billion
- Dividend yield: 2.5%
- Costs: 0.94%
Another place to find performance amid inflation is commodities.
If you’ve ever heard the phrase “too many dollars behind too few goods” it is referring to “demand-pull inflation”. Well, commodities like oil, gold, grain, and lumber are the resources that are used to make the goods that these dollars chase.
In such an environment, commodity funds like Parametric commodity strategy investor (EAPCX, $ 6.38) can thrive by investing in the very same assets whose prices are rising.
EAPCX invests in a broad basket of commodities, with agricultural, energy and industrial metals each making up about a quarter of the fund and precious metals and livestock making up the rest. That means you’re invested in everything from cocoa and crude oil to copper and cattle.
Parametric’s fund receives five stars from Morningstar for three- and five-year returns that outperform at least 90% of its competitors. Its 0.94% annual spend is more expensive than any of the other mutual funds on this list, but absolutely average in the commodities space.
Learn more about EAPCX on the Eaton Vance provider page.
Vanguard real estate index Admiral
- Fund category: property
- Assets Under Management: $ 42.2 billion
- Dividend yield: 3.2%
- Costs: 0.12%
Vanguard real estate index (VGSLX, $ 146.79) is an inexpensive way to invest in real estate investment trusts (REITs).
REITs are a specially structured company designed to own (and sometimes operate) properties of various types. Office building. Hotels. Hospitals. Even storage units.
REITs provide natural inflation protection as their underlying properties (and the rents they collect) tend to appreciate in value alongside consumer prices. This added profitability tends to help REITs improve their dividends (remember: REITs are required to pay at least 90% of taxable profits to shareholders as dividends), often faster than inflation.
Neuberger Berman’s research shows how resilient REITs have been to inflation:
“In the 12 calendar years since 1991, when inflation was below 2%, the average return on the REITs index was 7.4%. If we take out the extreme year of 2008, that average rises to 11.5%. 18 calendar years when inflation was above 2% was 16.5%. Periods of higher inflation appear to have benefited REITs. “
This of course makes products like VGSLX the best mutual funds to buy to fight inflation. Vanguard’s offering includes around 180 real estate companies, including top holdings such as communications infrastructure company American Tower (AMT), logistics REIT Prologis (PLD) and data center owner Equinix (EQIX).
The fund also comes in ETF form: the Vanguard Real Estate ETF (VNQ), which also only charges 0.12% per year.
Learn more about VGSLX on the Vanguard providers page.
T. Rowe Price Floating Rate
- Fund category: Bank loan
- Assets Under Management: $ 3.5 billion
- SEC yield: 3.5%
- Costs: 0.76%
Bank loans are a less common category, but investors may want to take a closer look as they fight inflation.
Phases of inflation and rising interest rates often go hand in hand, which puts downward pressure on many bonds and other fixed income investments. However, a certain category of bank loans known as floating rate bank loans can do well in this environment. Financial institutions often provide floating rate loans to companies with less than ideal credit ratings, and the interest rates on these loans can change every 30 to 90 days. If the interest rate rises, so will the interest on these loans.
T. Rowe Price Floating Rate (PRFRX, $ 9.58) provides exposure to floating rate bank loans and other floating rate debt securities. The portfolio is spread over around 400 loans, the vast majority of which are rated below investment grade. However, the effective term of the loans is only five years and the fund has a low duration of 0.40. (Duration is a measure of bond risk; 0.40 means that a 1 percentage point increase in interest rates would only decrease the net asset value of PRFRX by 0.4%.)
While there is some credit risk here, T. Rowe Price Floating Rate is one of the best mutual funds for fighting inflation if you want a decent return too.
Learn more about PRFRX on T. Rowe Price’s provider page.
Kent Thune had no positions in these bond funds at the time of this writing. This article is provided for informational purposes only, so under no circumstances does this information constitute a specific recommendation to buy or sell any security.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.