Sure, we all seem to have varying degrees of concerns about rising prices. Warren Buffett sees inflationary pressures, but doesn't seem overwhelmed by them. In fact, he thinks U.S. stocks may be your best weapon against them, rather than hedges in the commodity space. Someone like Jim Rogers, on the other hand, believes commodities and Asia stocks may be your only chance.

Me? Like most, I believe inflation will indeed be a problem... but that we will not experience the runaway inflation of the early 80s or the hyperinflation of 2008.

Nevertheless, it's hard to ignore some of the more daunting economic realities. Over the last 50 years, federal taxes might take in 18% of GDP, while our government may have spent 20% of GDP. That created the infamous U.S. budget deficit where the U.S. spends more than it makes/takes in tax revenue.

Here's the scary part. Assuming the U.S. is fully employed, spending will account for 26% of GDP in 2020 with taxes coming in at 19% for a 7% annual deficit. (I haven't even mentioned negative compounding!)

The debt for the U.S will be so alarming that foreign investors may not want our treasury debt or the less-than-stellar yields on depreciating dollar assets. As the currency deteriorates, our weak dollar would make it more expensive to acquire goods and services. Alas, inflation.

If the markets are forward thinking, then inflation-hedging investments should already be performing rather nicely in '09.

Inflation-Fighting ETFs: How Are They Performing in 2009?
      
     YTD (Through 7/24/09)
      
iShares TIPS Bond Fund (TIP)  

1.34%

PowerShares Dollar Bearish (UDN) 

4.00%

PowerShares DB Total Commodity Index (DBC)

6.89%

SPDR Gold Trust (GLD)  

7.96%

PowerShares DB Precious Metals (DBP) 

9.24%

SPDR International Gov't Inflation Protected (WIP)

10.66%

PowerShares DB Base Metals (DBB) 

39.38%

UltraShort 20+ Treasury (TBT)  

40.98%

Few would be able to look at the inflation-fighters and ignore the returns. Granted, TIP hasn't done a whole heck of a lot, but this is pretty cheap insurance. And betting against the U.S. dollar directly has, in fact, produced some gains via UDN.

Others may argue that the S&P 500 has performed equally well as total commodity trackers such as the PowerShares Total Commodity Index (DBC). And they'd be right. Most commodities seem to be trending in the same general direction as stock assets these days.

True, base metals in DBB are impressive; however, this has more to do with China's acquisition of natural resources for building stuff and less to do with inflation-hedging.

You want inflation-hedging? Then your biggest success story is SPDR International Inflation-Protected Bonds (WIP). International inflation-protection is a way to fight inflation and hedge against a lower U.S. dollar simultaneously... and investors have been doing just that.

We should also note that foreign stocks may be a good way to hedge against U.S. inflation and dollar devaluation. Yet who would ever think to look to Japan? Some describe the country's prospects as deader than a rusty collection of doornails.

Indeed, the pricey yen makes it difficult for a cost-conscious world to import Japanese goods. What's more, consumption on Japan's home front may be in worse shape than here in the U.S.

So would you be surprised to learn that a small-cap Japan ETF was the sole fund to meet the following criteria:

(1) 1-year rolling returns that are effectively flat or positive (-2% or better)
(2) 10 percentage points within striking range of a 52-week high, and a...
(3) Price/Sales below 1

Actually, it's not surprising to discover so few ETFs able to survive such a screen. The surprising part, if you will, is that the singular fund to make the trip comes from the recession-ravaged Land of the Rising Sun.

SPDR Russell/Nomura Small Cap Japan (JSC) is designed to track the total return of the float-adjusted Russell/Nomura Japan Small Cap Index -- a benchmark comprised of the smallest 15% of stocks in the Russell/Nomura Total Market Index. According to the State Street web site, the fund's largest 4 segment weightings include industrials (20%), consumer discretionary (20%), materials (15%) and financials (13%).

With so many folks focused on calendar year gains, it's intriguing to note that only a baker's dozen stock-based ETFs can boast a -2% 52-week return or better. More importantly, of those that are flat or positive after 1 year, how many of them are still priced at exceptional bargains?

For all the focus on price-to-earnings, sales numbers are far more difficult to manipulate by corporations; accounting gimmickry is much more challenging with sales than it is with so-called earnings. It follows that value investors often chomp at the bit to get an index where the current price is effectively lower than the sales per outstanding shares.

Although I had Small Japan on my Xmas wish list, it hit stop-loss parameters in January. Call it... an ETF that got away.

Disclosure Statement: ETF Expert is a web log (blog) that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.

You can view Gary's daily market commentary at www.ETFexpert.com. You can also email him directly at garygordon@mypacificpark.com.