Inflation is in the news again, thanks to worries over the historic deficit spending in Washington today. If the Fed gets the timing wrong on the next round of interest rate hikes, then inflation could be a real problem.

According to a recent working paper by the International Monetary Fund:

“Given the policy tools employed through the crisis so far, particularly massive injections of liquidity and quantitative easing, the risks of this outcome remain significant. This implies that inflation hedging should remain an important component of long-run investment policy.”

To that end, here are 13 ETFs …

TIPS (Treasury Inflation Protected Securities)

For domestic TIPS, check out the iShares Barclays TIPS Bond Fund (TIP) and SPDR Barclays Capital TIPS (IPE). TIP is has over $14 billion in assets and sports a 0.2% expense ratio and 4.68% yield. By contrast, IPE has $288 million in assets, a  0.19% expense ratio.

Like everything else in the investing world these days, there’s an international option: the SPDR DB International Government Inflation-Protected Bond ETF (WIP), which follows inflation-indexed bonds in foreign markets. WIP has $394 million in assets, a 3.70% yield and a 0.5% expense ratio.
TIPS have lost value recently because the major fear is still deflation, but by the time everyone is talking about inflation as a serious threat, their price will have shot up.

Gold and Precious Medals.

Commodities are a classic inflation hedge, and now you can use ETFs to simplify your diversification.
Here are some of the more popular ETFs in this category:

• SPDR Gold Trust (GLD) (stores underlying gold in a vault)

• iShares Silver Trust (SLV)

• PowerShares DB Gold Fund (DGL)

• PowerShares DB Precious Metals Fund (DBP)

• PowerShares DB Base Metals Fund (DBB) (indexed to industrial metals such as aluminum, copper and zinc)

• PowerShares DB Agriculture Fund (DBA) (for shelter from rising food prices)

Energy, especially Oil stocks, are also another type of inflation hedge. Here are 2 solid ETFs from this category:

• U.S. Oil Fund (USO) (tracks crude-oil futures contracts)

• Energy Select Sector SPDR Fund (XLE)

Foreign Currency.

Another potential hedge might be foreign currencies, since the dollar would likely lose value against foreign currencies if inflation rages. Here are 2 choice ETFs for that hedge:

• CurrencyShares Euro Trust (FXE)

• PowerShares DB Dollar Index Bearish Fund (UDN)

No one can say for sure whether we’re in for times of high inflation, deflation or a return to normalcy (whatever that is), but it’s important to have a least some of your portfolio in various vehicles for insurance against such wealth destroying environments.

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I just got a Bottom Line Magazine offer in the mail, and thought I needed to blog about this one of the “smart money tip” inside.

The tip is titled “Make Your Grandchild a TAX-FREE Millionaire!” and they include this nice chart showing a lump sum investment growing skyward to $2 million.

How it works.

The basis of this tip is the Roth IRA, which allows the gains to be taken out tax free after a certain age. Here’s how it goes…

Once your teenage grand child is gainfully employed, they contribute $4,000 between the years of 16 and 21 and that’s it. The investments in the Roth IRA earn 10% a year (average over 49 or so years) and, voila at the age of 65 they grandchild has over $2 million tax-free.

Why it’s bunk.

First, let me say that the theory is sound and would work. The problem is that over the 49 years that the money is accumulating, inflation will be eroding the value of the dollar.

Assuming 3% inflation (average) and 10% return over 49 years, I entered these values into the inflation calculator at Forbes and that $2,000,000 will be worth approximately $449,619 in 49 years.

Don’t get me wrong, I’m not saying $449,619 is chump change, but it’s a far cry from $2,000,000!

As I said, the theory is sound and it’s not a bad idea, but don’t think you’re setting your grandchild up to be the next Gates or Rockefeller.

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