While the Fed's announcement was not expected by most economists, it could have been anticipated. Months earlier, the Fed embarked on an unprecedented experiment to use all stimulus measures in its power to revive a sinking economy and reverse an epic recession. In the meantime, the Fed had been joined in its fiscal pump-priming efforts by the U.S. Treasury, two Presidential Administrations, and most other leading central banks and governments around the world.

Never in world history has so much new money been created and public debt expanded so fast. March 18 served as confirmation that the "stimulus era" is far from over.

Given this new reality, what can you do to protect your clients' assets and attract new investors? One answer is to add an "anti-inflation" asset class to asset allocation disciplines. Fortunately, thanks to the growth of innovative ETFs, there are more attractive options available for this class than ever before. The combination of several such ETFs can help to further diversify portfolios while giving clients protection against a probable era of sharply higher inflation ahead. This column will help you evaluate ideas for building this class.

What Kind of Inflation?

Although the term "hyperinflation" is mentioned often by the media lately, it is probably an exaggeration for the U.S. economy. Typical prerequisites for hyperinflation include collapsing currencies, political instability, and price rises of 50% or more in a short period of time.

The annual increase in the U.S. Consumer Price Index for All Urban Consumers (CPI-U) has averaged 3.9% over the last 30 years and 2.5% over the last 15 years. Against this backdrop of price stability, sharply elevated increases in the costs of living may feel like hyperinflation to some people, especially retired clients living on fixed incomes. For portfolio planning purposes, let's consider (as a baseline scenario) an interval in which the CPI-U increases by about 40-50% over a five-year period – representing an average annual increase of about 7-9% per year. In this column, we'll suggest a model anti-inflation asset class that might be expected to perform fairly well in such an environment.

A related question is whether investors can count on the CPI-U to accurately reflect their personal cost-of-living increases. The answer is – absolutely not. The CPI-U was invented by (and controlled by) the federal government. As long as Social Security payments are adjusted for CPI inflation dollar-for-dollar, as they are now, the U.S. Government has a vested interest in maintaining a conservative CPI-U.

John Williams' Shadow Government Statistics argues that as a result of changes in the CPI-U methodology introduces in the early 1990s, CPI-U has understated true U.S. inflation by up to 7% annually. He further argues that the government already intends to replace CPI-U with a more conservative measure of inflation (C-CPI-U) that under-reports inflation by .4% per year compared to the current measure. You can read his full argument here:

• http://www.shadowstats.com/article/consumer_price_index

Here is one key point: Even if you could find a reliable way to tie your clients' retirement incomes or returns to CPI-U, it isn't enough. A true "anti-inflation" asset class should give them exposure to the "real deal" – the goods they will have to buy to support their lifestyles at future prices.

A second key point: As we saw in 2008 with energy prices, individual commodities can rise and fall dramatically in a short period of time. A solid anti-inflation class should be diversified among different types of ETFs including precious metals, currencies, energy, commodities, and bonds.

And a third: There are different types of inflation, and it helps to have an understanding of the type that may emerge in the U.S. economy. For example, one type is produced just after the trough of a recession, when a classic V-shaped rebound produces a spike in demand without a corresponding increase in the production of goods and services. Another type occurs when wars, natural disasters, and political instability greatly reduce the supply of goods and services.

These will not be the drivers of the next U.S. inflation wave. To understand what may push inflation, consider what agendas the Obama Administration and Federal Reserve are already promoting: 1) reduction of crushing public and private debt burdens; 2) revival of U.S. output, especially through domestic manufacturing and exports; and 3) higher asset prices, especially in residential and commercial real estate and the stock market. Across economic history, there has been one proven way to promote such an agenda: currency devaluation.

Three leading indicators of currency devaluation are all flashing confirmation: 1) the size and quality of the Fed's balance sheet, which stands behind the repayment of every dollar floating around the world; 2) the federal budget deficit, which the Congressional Budget Office now projects will be $9.3 trillion cumulatively over the next decade; and 3) the price of gold.

Of course, the devaluation of the U.S. dollar won't be as dramatic as it has been in some third-world countries because of the size and strength of the U.S. economy, the dollar's status as a reserve global currency, and the ability of the Fed and Treasury to gradually talk the dollar down over time.

The ideas that follow will help you create an all-weather anti-inflation asset class for clients using a diversified group of ETFs designed for an era of gradual dollar devaluation. The analysis of each category of inflation hedge, and the specific suggestions for anti-inflation ETFs, are designed to guide your own continuing analysis of these and other ideas.

Precious Metals

The Concept: For more than 2,500 years, gold and silver have been universal hard currencies adopted by virtually all of the world's civilizations – a "North Star" against which other currencies (especially paper) can be measured. The U.S. dollar was partially backed by gold in global commerce until 1971. In addition, the prices of gold and silver have often served as an accurate leading indicator of inflationary pressures. Precious metals also serve as protection against currency devaluation, and this is especially true at times such as the present, when many leading currencies are vulnerable at the same time.

The ETF Field: A previous Insight column covered the history of the two oldest and largest precious metals ETFs: SPDR Gold Shares (GLD) and iShares Silver Trust (SLV).

• Benefits of Adding Commodities to Asset Allocation Programs

These ETFs own bullion directly and are among the largest owners of their respective precious metals, currently controlling 35.8 million ounces of gold and 263 million ounces of silver, respectively. On a daily basis, share prices track closely to the price of one-tenth ounce of gold in GLD or 10 ounces of silver in SLV, and liquidity is enhanced by millions of shares trading per day. Newer ETFs in this category include:

• Other bullion-based ETFs, such as iShares COMEX Gold Trust (IAU).
• Futures-based ETFs offered by PowerShares and Deutsche Bank: DB Silver Fund (DBS), DB Gold Fund (DGL) and DB Precious Metals Fund (DBP).
• Ultra (double long) ETFs offered by Proshares and PowerShares-Deutsche Bank: Ultra Gold (UGL), Ultra Silver (AGQ); also PowerShares DB Gold Double Long ETN (DGP).

Narrowing the field: It usually makes sense to hold bullion-based ETFs rather than futures because gold and silver almost always trade in contango (longer-term future contracts cost more), and this results in incremental "roll-yield cost" over time. If interest rates were higher, futures-based ETFs could make more sense as they earn T-bill yields on cash collateral. Also, the high daily trading volumes of GLD and SLV can increase trading efficiencies.

Currently, silver looks a bit more attractive than gold for three reasons: 1) Government entities and the International Monetary Fund (IMF) still own substantial amounts of gold, which they could dump on the market, but which hold very little silver; 2) Silver trades in a much thinner gold market than gold, and supplies of new silver production currently are low due to mine cutbacks around the world; and 3) Silver currently trades at a discount to its "historic ratio" with gold, which tends to range from about 50-60 to 1. For the anti-inflation portfolio, let's include both GLD and SLV.

Currencies

The Concept: One way to hedge against dollar devaluation is to participate in ETFs that purchase futures contracts in foreign currencies. The share prices of these ETFs rise or fall proportionately (after fees) with the foreign currency's exchange rate versus the dollar.

The ETF Field: Rydex and Wisdom Tree offer extensive series of ETFs for participating in the world's leading currencies including the Euro (FXE, EU), Japanese Yen (FXY, JYF), British Pound (FXB), Australian dollar (FXA), and Chinese yuan (CYB). You can identify ETFs of Rydex, the pioneer in this category, because they begin with FX, the universal symbol for currency exchange. PowerShares and Deutsche Bank have introduced an innovative concept that enables participation in the dollar either long (UUP) or short (UDN) vs. baskets of foreign currency.

Narrowing the Field: The current puzzle in this category is to find any currency that will be stronger than a weak dollar. Over much of the past year, for example, any bet against the dollar denominated in Euros or British Pounds would have backfired.

Interestingly, there is one nation among the G7 economic superpowers that still has a functional banking sector and is not embroiled in vast government bailouts and stimulus programs – and that nation is Canada.

Canada's economy has a healthy balance between domestic consumption and exports and is heavily commodities-based, which increases inflation protection. Also, Canada has already crossed economic bridges, such as universal health care, that the U.S. has yet to confront. Because many Canadians yearn to shop, buy real estate or partially retire in the U.S., the Canadian government is not under intense pressure to devalue its currency vs. the U.S.

The choice for the currency component of the anti-inflation portfolio is Rydex's Currency Shares Canadian Dollar Trust (FXC). It is recommended as a hold until the point at which the Canadian and U.S. dollars reach parity.

Energy

The Concept: In normal times, several ETF choices can be attractive ways to participate in energy commodities as inflation hedges, which helps to offset price increases that clients experience in energy bills. Many of these ETFs participate in one or more futures contracts in the energy complex – crude oil, gasoline, heating oil, and natural gas.

The Field: The oldest ETFs in the energy complex (both of which are now more than three years old) are U.S. Oil Fund (USO), which invests mainly in crude oil futures, and PowerShares DB Energy Fund (DBE), which holds a basket of energy complex futures. Newer futures-based entries include the iPATH S&P GSCI Crude Oil Total Return Index Exchange-traded Note (OIL) and a double-long crude oil futures ETFs offered by ProShares (UCO).

More than a dozen ETFs offer exposure to stocks in the energy sector – the most popular of which are the Energy Select SPDR (XLE) and Oil Service Holders Trust (OIH). PowerShares sponsors several innovative ETFs that offer exposure to "clean, green" energy stocks, both domestically and internationally.

Narrowing the Field: Unfortunately, these are not normal times in energy futures. As a previous column explained, leading energy complex futures contracts (e.g., crude oil, heating oil and gasoline) historically have tended to trade in backwardation, which has added to their long-term returns:

• Benefits of Adding Commodities to Asset Allocation Programs

However, most energy complex contracts currently are trading the opposite – in contango – which creates a continuing headwind to performance. If backwardation returns to these contracts, you may want to consider both USO and DBE. For now, a better choice may be a well diversified ETF for energy complex stocks such as XLE. In addition, clean and green energy appears to be a theme that will have legs for years to come, and green energy stocks tend to perform best when oil prices are rising. So, you may want to balance a traditional energy stock ETF with a green-power ETF such as PowerShares' Wilderhill Clean Energy (PBW).

Commodities

The Concept: There are two basic ways to participate in commodities: 1) through a diversified commodities futures index-tracking fund; or 2) through specialized baskets that participate in selected categories of futures or individual futures contracts. In addition, you can consider ETFs that track stocks of the Basic Materials sector.

The Field: The diversified commodities index-tracking funds include iShares S&P GSCI Commodity-Index Trust (GSG), PowerShares DB Commodity Index Tracking Fund (DBC), and iPath Dow-Jones-AIG Commodity Index Tracking ETN (DJP). Of the three, GSGI tends to overweight the energy sector the most, with energy futures accounting for about two-thirds of its total weight. Barclays Bank has has launched a series of iPath ETNs that offers exposure to commodities sectors (grains, industrial metals, livestock) and individual futures contracts (aluminum, cotton, coffee, sugar).

Narrowing the Field: Two sectors of the futures complex, food and industrial metals, have direct "wallet impact" on consumers' cost-of-living, and both also have been beaten down in recent months. PowerShares and Deutsche Bank offer baskets of futures contracts that diversify across different contracts in these complexes, and they also offer some protection against contango cost via a unique "Optimum Yield" roll method. They are DB Agricultural Fund (DBA) for corn, soybeans, sugar and wheat and DB Base Metals Fund (DBB) for aluminum, copper and zinc. Trading volume and liquidity is excellent in DBA and modestly good in DBB.

Bonds

The Concept: Which investors are most vulnerable to sustained rates of high inflation? Many advisors believe it is their retired clients living fixed incomes, including coupons from long-term bonds. Interest rates generally rise with inflation, which reduces the principal value of such bonds. Also, the purchasing power of "coupon interest" is gradually eroded by higher costs of living. Inflation favors debtors by reducing the real value of their principal owed and punishes long-term lenders (e.g., bondholders).

The Field: The most outside-the-box idea included in this column is to short long-term bonds. ProShares, the leader in short ETF strategies, offers two possible instruments, both of which have begun to catch on lately with investors who believe the Fed and Treasury have embarked on policies that will make long-term U.S. Treasuries far less attractive to the world's investors over time, whether or not inflation heats up. They are: UltraShort 7-10 Year Treasury (PST) and UltraShort 20+ Year Treasury (TBT).

Narrowing the Field: Why would anyone short long-term U.S. Treasuries after the Fed has announced they are purchasing $300 million of these instruments – with perhaps even more Treasury purchases to follow? The answer is complex – but in truth the Fed may focus purchases primarily on Treasuries with maturities of 10 years or less. That makes PST more vulnerable to Fed action than TBT. By making this announcement, the Fed has effectively given a put to the world's largest holders of long-term Treasuries (e.g., the Chinese and Japanese), creating a market into which they can sell without triggering heavy price declines.

TBT participates in swaps on the Barclays Capital 20+ Year U.S. Treasury Index. This index consists of just nine long-term Treasury bonds with remaining maturities ranging from 20-29 years and an average weighted maturity of a bit over 25 years. In other words, TBT is a way to short the longest maturity Treasuries, those with the greatest price risk and inflation-sensitivity.

Some observers believe the Fed's "quantitative easing," a rare and extreme form of credit expansion, will be temporary and targeted and will focus primarily on keeping rates low on the short-term end of the yield curve (where most Treasury borrowing takes place). TBT offers a way to help your clients insure against runaway federal deficits, the Fed's inability to continue quantitative easing (or the economic impact in reversing it), and the potential devaluation of U.S. dollars in all types of savings and investment instrument:, especially pensions, annuity payouts and long-term bonds. TBT is an example of an ETF that was created primarily for one purpose (protecting against rising Treasury interest rates) that has developed yet another useful application: hedging against sustained rates of higher inflation.

By double-shorting long-term Treasuries, TBT does have price volatility; however, by tracking this ETF over a period of time, you will see that it does not produce share price swings as greats as those in Proshares' ultra short equity ETFs. Held in moderation, TBT may have a place in an anti-inflation portfolio, especially after the Fed bond purchases have run their course, and also when you consider that 30-year Treasuries (currently yielding about 3.6%) no longer meet the needs of many credit-conscious, inflation-sensitive lenders around the world.

In Summary

The table below summarizes a diversified mix of some of the best anti-inflation ETF ideas discussed in this column. We believe this asset class could be weighted at up to 20% of a total portfolio for retired clients living primarily on pensions, annuity payments and fixed incomes ? and perhaps at lesser allocations for younger or more equity-oriented clients. To maintain diversification, we suggest holding such ETFs on an equal-weight basis with periodic rebalancing.

Only two ETFs in this portfolio, XLE and PBW, participate in equities. Therefore, it can be expected to have fairly low correlations with both stocks and bonds, enhancing overall portfolio diversification. The weighting in TBT helps to produce negative correlations with long-term bonds.

Since the Fed's announcement on March 18, this portfolio has performed fairly well as the whole. Any of these ETFs could increase in price to a point at which profit-taking is advisable and substitutes are warranted.

However, this is not a one-month or even a one-year idea. For inflation to have a big bite in your clients' purchasing power, it must continue for years – and that means the strongest anti-inflation ideas could continue to work well over time, with some interim fluctuations and volatility.

Higher inflation is coming – because the world has never before seen concentrated stimulus programs of this scale occurring simultaneously. The only real question is how much inflation, how soon, and how long. The ETF revolution has created new opportunities to help your clients diversify portfolios and protect purchasing power in the challenging years ahead.