Over the past year, the money supply in the United States has grown at an unprecedented rate and these alarming trends are showing significant signs of acceleration as coronavirus stimulus programs continue to pump trillions of dollars into the economy. Unfortunately, this is a market environment that presents unique challenges for investors looking to achieve long-term returns because portfolios have been forced to absorb the impact of reduced purchasing power.
Income-oriented investors will normally gravitate toward low-risk investment strategies that are capable of generating a stable yield over time. But when inflationary pressures begin to erode the potential for profitability in these investments, investors must find dependable ways to hedge their portfolios and protect against declines in purchasing power during periods of unprecedented inflationary pressure.
Throughout the history of the financial markets, gold has provided exactly this type of protective stability for investors and the Strategy Shares Gold-Hedged Bond ETF (NYSE:GLDB) capitalizes on these long-term trends by combining U.S. investment-grade corporate bonds with a 100% gold inflation hedge - all in a single portfolio.
Specifically, the Strategy Shares Gold-Hedged Bond ETF was designed to track the performance of the Solactive Gold-Backed Bond Index as an optimal way of generating steady income while maintaining an appropriate level of stability in portfolio purchasing power over time.
Overall, this innovative approach to income investing is based on the idea that secure exposure to gold adds the unique potential for bond investors to achieve a true hedge against both rising inflation and long-term declines in the U.S. dollar.
In response to these developing trends in money supply, a growing number of market analysts have questioned whether the Federal Reserve is deliberately trying to create inflation as a way of artificially breathing life back into the U.S. economy. But while the country continues to recover from a period of prolonged economic weakness, the market’s recent disruptions have only exacerbated longer-term trends and created additional problems for bond investors because U.S. dollar valuations continue to show an erosion of purchasing power on a relative basis. Ultimately, these trends are nothing new and lessons from the past can offer some key insights for modern investors. Following the dissolution of the Bretton Woods System in 1973, inflationary pressures in the United States helped erode the value of the U.S. dollar by over 80%. Since the 2008 financial crisis, M1 Money Supply in the United States has ballooned by more than 1,200% and M2 Money Supply has risen above the $20 trillion mark. Of course, these alarming trends in monetary policy have no historical precedent and this is precisely the reason investors must adopt strategies that protect retirement portfolios from unexpected macroeconomics pressures.
Similar long-term trends have been present in other major economies around the world and there is little evidence to suggest that the sustained trend of declining value in fiat currencies will be changing any time soon. Fortunately, it’s clear that gold has done an excellent job of maintaining (and growing) its purchasing power even while market valuations in global currencies have encountered a significant erosion of value.
When bond investors are developing a proactive strategy to guard against these types of emerging economic factors, funds like the Strategy Shares Gold-Hedged Bond ETF are able to play a critical role in defining an adaptive approach to portfolio management in an inflationary regime. Essentially, GLDB makes it easier for bond investors to gain exposure to the Solactive Gold Hedged Bond Index and protect against the declines in portfolio purchasing power that have remained persistent throughout this increasingly challenging market environment.
Additionally, the fund’s bond component offers the potential to generate fortified income levels via well-positioned exposure to the investment-grade bond sector in the United States. When combined with this natural inflation hedge, backtesting results show that the Strategy Shares Gold-Hedged Bond ETF would have outperformed the Bloomberg Corporate Bond Index by a wide margin. Note, the table of returns shown above outlines the hypothetical index returns for the Solactive Gold Hedged Bond Index rather than the actual returns of the fund. In the current environment, the stimulus is driving bullish activity in the markets but the extremity of these historic policy measures are likely to produce unintended consequences over time. Ultimately, these are factors that can become problematic once the Fed is forced to taper and this is why the Strategy Shares Gold-Hedged Bond ETF invests in a portfolio of bonds that tracks the Solactive Investment Grade Corporate Bond Index. Using this ground-breaking approach to portfolio design, investors are able to hedge against inflation with assets that tend to rise when valuations in the U.S. dollar are declining. In this way, GLDB is uniquely positioned to perform as a safe haven asset during times of uncertainty and turmoil.
Original publication: June 2021.