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One thing is certain: Inflation is rapidly eroding our purchasing power.

And as the Fed raises interest rates aggressively to tame inflation, stocks are getting heavily sold off.

Here’s the good news: Some sectors thrive in periods of high inflation. Owning high-quality assets in these sectors could make your portfolio more resilient in these challenging times.

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Energy

One of the surest signs of surging inflation is in the commodities rally we saw since 2021. In fact, commodity prices are commonly believed to be a leading indicator of inflation.

So it shouldn’t come as a surprise that oil — the most traded commodity in the world — has climbed significantly.

Despite pulling back most recently, the price of crude oil is still up 40% year to date.

Investors can tap into the oil price boom through ETFs like the United States Oil Fund (USO).

Natural gas is another hot commodity. The United States Natural Gas Fund (UNG), which tracks movements in natural gas prices, has soared 65% in 2022.

Strong energy prices benefit producers. In fact, energy was by far the best performing sector of the S&P 500 in 2021, returning a total of 53% vs the index’s 27% return. And that momentum has carried into 2022.

So far this year, investors have enjoyed outsized returns from names like Chevron (20%), Exxon Mobil (35%), and Occidental Petroleum (83%).

Healthcare

The demand for healthcare is found to be quite inelastic to price changes: if you are sick, you are not going to be that price sensitive.

That’s why healthcare companies can still thrive in times of inflation.

And because of its lack of correlation with the ups and downs of the economy, healthcare is a prime example of a defensive sector.

In addition, the sector has a lot of room for long-term growth due to favorable demographic trends — notably an aging population — and plenty of innovation.

Established healthcare companies also have the ability to deliver increasing cash returns to shareholders. For instance, Johnson & Johnson (JNJ), Abott Laboratories (ABT), and Cardinal Health (CAH) have made it to the list of Dividend Aristocrats – companies that have paid increasing dividends for at least 25 years.

For broad exposure to the sector, investors can look into ETFs like the Vanguard Health Care ETF (VHT) and the Health Care Select Sector SPDR Fund (XLV).

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Real estate

As a well-known hedge against inflation, real estate rounds out our list. As the price of raw materials and labor goes up, new properties are more expensive to build. And that drives up the price of existing real estate.

Well-chosen properties can provide more than just price appreciation. Investors also get to earn a steady stream of rental income.

But while we all like the idea of collecting passive income, being a landlord does come with its hassles, like fixing leaky faucets and dealing with difficult tenants.

Thankfully, there are real estate investment trusts, which are companies that own income-producing real estate like apartment buildings, shopping centers and office towers. Many REITs trade on the stock market, so investors can buy and sell them throughout the trading day.

Realty Income (O), for instance, is a REIT with a portfolio of over 11,000 properties. The company has been paying uninterrupted monthly dividends since its founding in 1969 and currently offers an annual yield of 4.4%.

If you don’t want to pick individual winners and losers, ETFs such as the Vanguard Real Estate ETF (VNQ) can provide easy access to the group.

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Fine art as an investment

Stocks can be volatile, cryptos make big swings to either side, and even gold is not immune to the market’s ups and downs.

That’s why if you are looking for the ultimate hedge, it could be worthwhile to check out a real, but overlooked asset: fine art.

Contemporary artwork has outperformed the S&P 500 by a commanding 174% over the past 25 years, according to the Citi Global Art Market chart.

And it’s becoming a popular way to diversify because it’s a real physical asset with little correlation to the stock market.

On a scale of -1 to +1, with 0 representing no link at all, Citi found the correlation between contemporary art and the S&P 500 was just 0.12 during the past 25 years.

Earlier this year, Bank of America investment chief Michael Harnett singled out artwork as a sharp way to outperform over the next decade — due largely to the asset’s track record as an inflation hedge.

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About the Author

Jing Pan

Jing Pan

Investment Reporter

Jing is an investment reporter for MoneyWise. Prior to joining the team, he was a research analyst and editor at one of the leading financial publishing companies in North America. An avid advocate of investing for passive income, he wrote a monthly dividend stock newsletter for the better half of the past decade. Jing holds a Master’s Degree in Economics and an Honours Bachelor of Science Degree, both from the University of Toronto.

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