Deflation Risk? How You Can Profit…

| May 21, 2010 | 0 Comments

Did you see the latest news?  Inflation is now at a 44-year low.

According to U.S. government numbers (if you can trust them), prices were flat from the previous month.

Core consumer prices are only up 0.9% in the last year.  Remember, core prices strip out volatile food and energy prices.  Any way you slice it, this is well below the Fed’s target inflation rate of 1.5% to 2%.

It looks like inflation fears have been overdone.  Now the possibility of deflation is back on the table.

So where should we invest if deflation takes hold?

The simple answer is… cash Cash is king.

If deflation takes hold, I see the U.S. Dollar benefiting from its role as the world’s reserve currency.  The U.S. Dollar is a safe haven.  It jumps in value as investors seek the safest currency available.

One way to play the trend in the U.S. Dollar is by purchasing the PowerShares DB US Dollar Index Bullish ETF (UUP).  UUP goes up in value as the U.S. Dollar goes up in value relative to a basket of foreign currencies.

Another area to look at is income producing investments.

During a prolonged period of deflation, stock price gains are often stunted.

Just look at Japan.  They’ve been struggling with deflation for over a decade.  In the 1990s, their government bailed out banks after bubbles in equities and real estate burst.  (Sounds familiar doesn’t it?)

The Japanese stock market is stuck in a perpetual bear market.  It’s never been able to get back to the highs set in the early 1990s.

If Japan is any indication, stock price gains could be nonexistent for U.S. focused buy and hold investors.  That puts a premium on dividend paying stocks.  Dividends will be the best way to generate decent returns.

There are a number of ETFs that focus on dividend paying stocks.

Take a look at the iShares Dow Jones International Select Dividend Index Fund (IDV).  It holds a basket of stable, dividend paying companies from around the world.  It’s currently yielding 3.87%.  A perfect way to grab a good yield with international diversification.

You should also look at preferred stock.

A preferred stock is a hybrid of a stock and a bond.  Dividends aren’t always guaranteed like with a bond.  But often the company must pay preferred dividends prior to paying dividends on the common stock.

iShares offers an ETF focused on U.S. preferred stocks.  Take a look at the iShares S&P U.S. Preferred Stock Index Fund (PFF).  It’s currently yielding better than 7%.

Early indicators are pointing toward the possibility of deflation.  These three ETFs should deliver solid profits in a deflationary environment.  Keep these ETFs in mind as we see continued pressure on consumer prices.  They’re not going to blow your doors off with explosive growth, but they’ll deliver solid income even if stock prices are flat.

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Category: ETFs

About the Author ()

Corey Williams is the editor of Sector ETF Trader, an investment advisory service focused on profiting from ETFs and the economic cycle. Under Corey’s leadership, the Sector ETF Trader has become one of the most popular and successful ETF advisories around. In addition to his groundbreaking service, Corey is the lead contributor to ETF Trading Research, where he shares his insights about ETFs and financial markets on a daily basis. He’s also a regular contributor to the Dynamic Wealth Report and the editor of one the hottest option trading services around – Elite Option Trader.

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