Signs of inflation have apparently returned to the U.S. economy after an absence of nearly 15 years.

Sam Stovall, chief investment strategist at Standard & Poor’s, cites the Consumer-Price Index (CPI) rose 1.2% during September and 4.7% on a year-over-year basis — the highest increase since June 1991 — driven primarily “by stubbornly high energy prices.” The labor department said yesterday that wholesale prices increased 1.9% last month.

As the Federal Reserve seeks to curb inflation by exercising changes in the Fed Funds rate, some mutual fund and stock investors may seek to move their assets into sectors that have historically performed well during inflationary periods. As a tactical play, exchange-traded funds (ETFs) focused on these sectors may provide some relief against rising consumer prices.

According to Stovall’s research, which examined eight periods of “inflation acceleration” between June 1972 and September 2005, energy, health care, materials and utilities recorded better average price gains and ‘frequencies’ of outperformance than did consumer discretionary, financial, industrials and information technology sectors. Gold and precious metals shares have also outperformed during such periods.

Still, investors should be aware that equity sector ETFs, even those that are focused on more defensive sectors rather than cyclical ones, can court significant risk if overweighted because of the higher volatility and concentration associated with them. Instead, sector ETFs might be applied more sparingly to a portfolio of stocks and bonds depending on an investor’s overall asset and sector allocation.

The following table shows a sampling of ETF that invest in sectors of the market most resistant to inflationary pressures.

ETF

One-Year Return (%)*

Three-Year Annualized Return (%)*

Expense Ratio (%)

ENERGY
S&P Select Energy SPDR Fund (XLE)

+55.3

+38.7

0.27

iShares S&P Global Energy Sector Index (IXC)

+48.4

+34.4

0.65

iShares Dow Jones U.S. Energy Sector Index (IYE)

+47.8

+36.1

0.60

Vanguard Energy VIPERs (VDE)

+53.7

N.A.

0.00

HEALTH CARE
S&P Select Health Care SPDR Fund (XLV)

+10.3

+9.7

0.27

iShares S&P Global Health Sector Index (IXJ)

+12.2

+10.7

0.65

Vanguard Health Care VIPERs (VHT)

+13.0

N.A.

0.28

iShares Dow Jones U.S. Health Sector Index (IYH)

+12.2

+10.9

0.60

MATERIALS
S&P Select Materials SPDR Fund (XLB)

+1.7

+18.1

0.27

iShares Dow Jones U.S. Basic Materials Sector (IYM)

+4.0

+17.4

0.60

Vanguard Materials VIPERs (VAW)

+2.6

N.A.

0.28

UTILITIES
S&P Select Utilities SPDR Fund (XLU)

+38.2

+26.3

0.27

iShares Dow Jones U.S. Utilities Sect Index (IDU)

+36.6

+25.0

0.60

Vanguard Utilities VIPERs (VPU)

+32.2

N.A.

0.28

METALS
streetTracks Gold Shares (GLD)

+6.32

N.A.

0.00

iShares COMEX Gold Trust (IAU)

N.A.

N.A.

0.40

*Source: Standard & Poor’s. Total returns are in U.S. dollars and include reinvested dividends. Preliminary data as of 9/30/05.

Contact Bob Keane with questions or comments at: bkeane@investmentadvisor.com.