Inflation-Friendly Equity Indices: How to Protect against Rising Inflation in Equity Portfolios?

Abstract

This article proposes a method to construct inflation-friendly equity strategies that offer protection against inflation surprises. Such strategies offer stronger and more consistent inflation exposures than commonly used off-the-shelf ingredients, such as sector or style factor portfolios. We rely on firm-level measures of inflation exposures that improve robustness when compared with standard estimation approaches. We show how to construct these inflation-friendly equity strategies and how they can be designed as a replacement of cap-weighted benchmarks in long-term strategic allocations or for tactical allocations. Furthermore, we illustrate the benefits of such strategies for investors, presenting two concrete investment cases.