How to trade the 40-year-high inflation like top investors using ETFs

Published Thu, Feb 10 20222:07 PM ESTUpdated Thu, Feb 10 20226:37 PM EST

Inflation, which just hit a fresh four-decade high, has prompted some of Wall Street's biggest investors to double down on their favorite trades to benefit from surging price pressures. U.S. consumer prices spiked in January by more than expected, with the consumer price index rising 7.5% year over year for its highest reading since 1982. The persistently high inflation is putting more pressure on the Federal Reserve to raise interest rates. Following Thursday's hot reading, the market was pricing in a 77% probability of six rate hikes in 2022. A slew of longtime money managers and investors — from Paul Tudor Jones to David Einhorn and Seth Klarman — have recently warned about the growing inflation threat to the market and revealed their preferred trades to hedge the risk. Baupost Group's Klarman said in a letter last month that inflation poses a "real danger" to the markets. Billionaire hedge fund manager Jones late last year called inflation the "No. 1 issue facing Main Street investors" and the "single-biggest threat" to financial markets and the economy. "It's absolutely dead for a 60/40 portfolio, for a long stock, long bond portfolio. So the real question is how you defend yourselves against it," Jones told CNBC in October. The founder and chief investment officer of Tudor Investment Corp. said that it's time to double down on inflation hedges including commodities and Treasury inflation-protected securities. Exchange-traded funds that invest in U.S. Treasury inflation-protected securities are a widely used hedge against price pressures in the fixed income space. TIPS are Treasury securities indexed to inflation, so when inflation rises, so does the principal amount of the security and their interest payments. The iShares TIPS Bond ETF and the Schwab U.S. TIPS ETF are two of the largest offerings on the market, and they are outperforming the S & P 500 so far in 2022. Einhorn's inflation plays Also issuing a dire warning on inflation was Greenlight Capital's Einhorn, who went so far as to say that persistent inflation is eventually going to tip the U.S. economy into another recession, no matter what actions the Fed takes. Greenlight was one of the first high-profile investors to bet on inflation on Wall Street. Since the rebound from the pandemic-induced sell-off, he's been adding to his investments that would benefit from higher prices in industries from real estate to financials to commodities. Late last year, Einhorn added a new $32 million position in the iShares Silver Trust ETF , a fund that mimics the precious metals' price. Commodities like silver and gold are considered traditional hedges because their prices usually rise when inflation is accelerating. Greenlight's main hedge fund just came off a banner fourth quarter with an 18.6% gain, versus an 11% return for the S & P 500. The biggest winners for Greenlight in the last quarter include a couple of inflation plays. Brighthouse Financial was one of Greenlight's biggest holdings. Einhorn previously said the financial firm is a bet to capitalize on equity markets' rebound and higher long-term interest rates. Another big gainer for Greenlight is its longtime holding Green Brick Partners . Einhorn said last year that it makes a good bet on rising housing prices as the economy recovers from the pandemic. Canadian mining company Teck Resources is also a lucrative bet for Greenlight. Cash is trash Bridgewater Associates' Ray Dalio is standing by his belief that cash is not the place to be, especially when heightened inflation eroded investors' capital. "Cash is not a safe investment, is not a safe place because it will be taxed by inflation," the founder of the world's biggest hedge fund told CNBC in November. During turbulent times, it's important to be in a safe, well-balanced portfolio, the billionaire investor said. "You can reduce your risk without reducing your returns. You will not market-time this. Even if you were a great market timer, the things that are happening can change the world, so it changes what could be priced into the market," Dalio said.

Traders work on the floor of the New York Stock Exchange (NYSE) on February 04, 2022 in New York City.

Spencer Platt | Getty Images

Inflation, which just hit a fresh four-decade high, has prompted some of Wall Street's biggest investors to double down on their favorite trades to benefit from surging price pressures.