The Case Against (Some) ETFs

The risks favor a high rate of inflation over the next 3 to 5 years. But there's always the possibility the Fed will remember its true purpose and decide to preserve the purchasing power of the dollar. If it does, the world economy could enter a prolonged period of little or no growth.

You can do a few things now to hedge your portfolio against either inflation or stagnant growth.

The oldest and best way to hedge against inflation is gold. If you don't already own some, now's the time to buy. Remember, you're not investing in gold to get rich, you're trying to avoid going broke. The SPDR Gold Shares ETF (GLD) provides an easy way to add gold to your portfolio.

Hedging against stagnant growth gets a bit trickier. In my opinion, non-cyclical companies paying a nice dividend are the best way to go. In particular, I like the utilities because of their steady revenue and dividend payments.

There are a host of different ETFs focusing on the utilities sector. The Vanguard Utilities ETF (VPU) is a good choice. VPU has a small (even by ETF standards) expense ratio of 0.25% while paying a 4.52% dividend yield.

The inflation debate will continue on. In a perfect world, economic growth will return and the Fed will pull the money supply out just right so we don't have high rates of inflation. But I'm not willing to go for broke. Hedge your portfolio now against a less than perfect economic recovery.

Joe Duggins of TX 5:41AM September 03, 2009