How to fight back against inflation

Gold

The metal was traditionally invested in through mining-company stocks and the mutual funds that invested in them. As a hedge, however, I prefer a gold ETF, which can be bought and sold more easily and can also be margined (or sold short, if you think this whole thing is a baseless panic).

The choice is between mining stocks and the metal itself. I own the StreetTracks fund, and there is another bullion fund, iShares Comex Gold Trust (IAU, news, msgs), that is ahead 14.2% this year.

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Mining stocks are more leveraged to the price of gold, because a small increase in the price per ounce can lead to much headier gains when spread over tons of production. Market Vectors Gold Miners ETF (GDX, news, msgs) tracks the Amex Gold Index, which includes such names as Barrick Gold (ABX, news, msgs), Goldcorp (GG, news, msgs) and Newmont Mining (NEM, news, msgs). It is up 9.9% this year and 23.4% in last 12 months.

Energy

This is a long-established mutual fund category, and most fund families offer a portfolio that invests in the broad sector, from exploration companies to refiners and marketers. Fidelity Investments has both Fidelity Select Energy (FSENX), up 32.7% this year, and Fidelity Select Energy Services (FSESX), up 51.5%, which specializes in that corner of the market.

The ETF world offers more choices, from the Energy SPDR (XLE, news, msgs), up 28.2% in 2007, to SPDR S&P Oil & Gas Equipment & Services (XES, news, msgs), up 34.8%. We have a complete, searchable list of ETFs at MSN Money.

My favorite energy fund, which is a holding of our model ETF portfolio, is iShares S&P GSSI Natural Resources (IGE, news, msgs), up 26.9% this year. I like it because it captures both energy, with 82% of assets, and industrial materials with the balance.

Commodities

Investments here have traditionally been limited to futures and options markets, but ETFs have opened this arena to fund investors. There are three notable funds:

• PowerShares DB Commodity Index Tracking Fund (DBC, news, msgs), up 11.8% this year, tracks six commodities: crude oil, 34%; heating oil, 21%; gold, 10%; aluminum, 11%; corn, 11%; and wheat, 13%.

• iPath Dow Jones-AIG Commodity Index Total Return (DJP, news, msgs), up 9.4%, tracks energy, 34%; agriculture, 30%; industrial metals, 18%; livestock, 9%; and precious metals, 9%.

• iShares S&P GSCI Commodity-Indexed Trust (GSG, news, msgs), up 15.3% this year, has 69% of its assets in energy and the balance distributed among industrial and precious metals, and agricultural commodities.

Energy isn't the only price-stressed marketplace. Midwestern farmers this year are getting as much as 40% over last year's price for corn, 70% for wheat and 75% for soybeans. The prices of beef and poultry, which feed on grain, are headed in the same direction.

Real estate

This category encompasses commercial rather than residential property, and it offers implicit inflation protection because both rents and property values go up with it. Funds that offer exposure to real-estate investment trusts (REITs) are ubiquitous.

In recent months, however, a new group of ETFs has emerged that focus on foreign real estate. SPDR DJ Wilshire International Real Estate (RWX, news, msgs) came to market first, last December. The SPDR has attracted assets of $1.01 billion, and at its peak in early June was ahead 16.4% this year. It has since tumbled to a year-to-date gain of only 0.9%, though it's up 2.1% for the past month.

It has been followed by WisdomTree International Real Estate (DRW, news, msgs) and iShares S&P World ex-US Property Index (WPS, news, msgs). The WisdomTree fund is up 5.7% in the past three months. The iShares ETF, which hasn't been around even that long, is up 3.9% in the past month.

I would wait to see how these funds perform over time before forming any judgment about them.

And I think we have plenty of time to adapt to the changing inflation scene. At this point, rising inflation is only a probability. I expect U.S. equities, especially large-cap growth funds, to perform well through at least the end of this year and probably well into next.

But longer term, higher inflation is inevitable. The drawbridge doesn't have to be pulled up just yet, but the walls of the castle need tending.

At the time of publication, Tim Middleton owned the following securities mentioned in this article: StreetTracks Gold Shares.

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