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ETF Strategies to Beat Inflation & Follow Warren Buffett

Inflation has been on an uphill ride lately as economic recovery has picked up on widespread vaccination, business restrictions have been relaxed and demand has jumped. The ongoing supply chain issues have also led to the sky-high inflation.

The annual inflation rate in the United States accelerated to 7% in December 2021, marking a fresh high since June of 1982, in line with market expectations and compared with 6.8% in November. Energy led to the jump but the rise was smaller than in November (29.3% versus 33.3%).

Against this backdrop, investors can follow a few techniques that Warren Buffett suggested or his company Berkshire believes in. These strategies can be practiced at the time of rising inflation. Below we highlight those investing ideas.

Bet on Apple-Heavy ETFs

Apple AAPL is a key holding of Berkshire’s portfolio, making up more than 40% of Berkshire’s portfolio by market value. There is a set of consumers who always choose to buy Apple products irrespective of inflationary pressure. This gives Apple the leeway to pass on the rising costs to consumers (which won’t hurt sales) due to sheer brand name.

Plus, Information Technology business normally does not require recurrent capital investments, which makes it an inflation-friendly investment. CNBC’s Jim Cramer said that big tech stocks are lucrative bets amid rising inflation and chances of higher interest rates (read: Follow Buffett With These Inflation-Friendly ETF Strategies).

Hence, one can bet on Apple ETFs like Technology Select Sector SPDR Fund XLK, Fidelity MSCI Information Technology Index ETF FTEC and Vanguard Information Technology ETF (VGT).

Banks: Great Bets Amid Inflation

Bank of America is another key holding ofBerkshire. Rising inflation will likely lead the Fed to hike rates in 2022. In anticipation, rates started to rise already. The biggest winner of the rising rate scenario is the banking sector. Decent valuation will add some more gains. As banks seek to borrow money at short-term rates and lend at long-term rates, a steepening yield curve earns more on lending and pay less on deposits, thereby leading to a wider spread. This expands net margins and increase banks’ profits.

Hence, Bank of America-heavy ETFs like iShares U.S. Financial Services ETF IYG, Invesco KBW Bank ETF KBWB and Financial Select Sector SPDR Fund (XLF) are intriguing picks right now.

Bet on American Express-Heavy ETFs

This is yet another Apple story. American Express AXP also displayed its pricing power recently as it hiked the annual fee on its Platinum Card. American Express is the third-largest holding at Berkshire Hathaway, only behind Apple and Bank of America, per a MoneyWise article, quoted on Yahoo. The article explained that American Express’ business model is inflation friendly. Merchants are charged a percentage of every Amex card transaction. As the price of goods and services rises, bill amounts also go up and  companies like AXP get a share of fatter bills. ETFMG Prime Mobile Payments ETF IPAY should stand to gain on this trend as it has solid exposure to companies like AXP, Visa (V) and Mastercard (MA).

Real Estate: Another Winning Bet

Buffett once suggested owning real estate during times of inflation because the purchase is a “one-time outlay” for the investor, does not incur recurring costs and involves resale value. In a rising-inflation environment, real estate stocks act as good bets. Both, resale value of the property and rental income, rise with price inflation.

Plus, the latest uptick in home prices is a boon for renters. Along with some analysts, we too believe that fast-rising home prices are likely to keep prospective homebuyers away from the ownership and direct them toward the rental market. Investors can thus play Real Estate Select Sector SPDR ETF (XLRE), which offers outsized yield too.

Consumer Staples: Inflation-Proof Sector?

Although we know that consumer staples companies like Coca-Cola KO is recession proof, these are kind of inflation-proof too. Consumer staples companies are non-cyclical in nature and buyers can’t do away with it. These companies also offer decent dividend yields. Berkshire has exposure to KO.

Sheer size and a great supply chain makes companies like Coca Cola and PepsiCo winners. Hence, one can bet on Coca-Cola & Pepsi-heavy ETFs likeiShares Evolved U.S. Consumer Staples ETF IECS, iShares U.S. Consumer Staples ETF IYK and Consumer Staples Select Sector SPDR Fund (XLP).  

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Apple Inc. (AAPL): Free Stock Analysis Report
CocaCola Company The (KO): Free Stock Analysis Report
American Express Company (AXP): Free Stock Analysis Report
Technology Select Sector SPDR ETF (XLK): ETF Research Reports
Invesco KBW Bank ETF (KBWB): ETF Research Reports
iShares U.S. Financial Services ETF (IYG): ETF Research Reports
iShares U.S. Consumer Staples ETF (IYK): ETF Research Reports
Fidelity MSCI Information Technology Index ETF (FTEC): ETF Research Reports
ETFMG Prime Mobile Payments ETF (IPAY): ETF Research Reports
iShares Evolved U.S. Consumer Staples ETF (IECS): ETF Research Reports
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