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Be Wary of These ETFs if Deflation Gets Really Bad

by Brett on August 3, 2010

Today Minyanville carried a piece entitled Seven ETFs to Play Deflation, which highlighted high dividend paying ETFs and interest paying bond funds.

While I agree with the premise IF deflation is mild and US growth is merely slower than normal, I’d be cautious about the dividend funds if we see a wicked wave of deflation a la 2008.  This is the credit destruction scenario that we discussed yesterday in the Bill Gross post.

I think this threat is being underestimated, as I don’t understand how many of the outstanding debt obligations are going to be paid.  If credit destruction takes hold, you should probably just hold off on the ETFs altogether in favor of CASH – under your mattress, in short-term government bonds via TreasuryDirect, etc.

While I’d love nothing more than to pick up some high quality, high yielding dividend stocks, and hold them for years as the dividends grow and roll in, I just don’t think it’s a smart move until we see better stock valuations.

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