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When looking at charts for an ETF (say an ETF tracking ACWI), then in order to understand how a share in the ETF is priced relative to a few years ago, should I factor in inflation as I would for ordinary goods and services (considering the stock market represents the entirety of goods and services in a way?)

For example, if inflation is at 2%, and 5 years ago the ETF traded at 100 USD, then if I pay 110 USD today (100*1.02^5), I should like it just as much as I did then even though it's more expensive, correct?

If so, are there any charts available for common indices like ACWI that adjust for inflation (I guess it would not be clear which rate of inflation should be used, but perhaps a global average?)

2 Answers 2

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For example, if inflation is at 2%, and 5 years ago the ETF traded at 100 USD, then if I pay 110 USD today (100*1.02^5), I should like it just as much as I did then even though it's more expensive, correct?

Depends on the purpose of the ETF. If people 5 years ago thought the performance of the investments was going to crush the rate of inflation, then it being up 10% would make them disappointed.

The question isn't how do you factor in the inflation for the last 5 years, it is do you think it will perform better than the appropriate index going forward.

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  • Why would an ETF perform better than the index it tracks? Isn't the goal of an ETF to track it as closely as possible?
    – mxk
    Jan 15 at 7:38
  • Not all ETFs follow an index. Some do, but some only use it as a starting point. Was the goal of the ACWI index to match inflation? In the question you want to compare the ETF performance to inflation. Jan 15 at 12:57
  • Ah OK, fair point -- I think I meant the underlying index then. But since you cannot buy the underlying index, I thought talking about the ETF makes more sense. What I was trying to get at here is how to calculate out inflation to remove anchoring effects from buying decisions, because nominally the share price may be up, but that could be purely because inflation is up by the same amount, not because the companies tracked in the index reported higher earnings or because valuations (i.e. investor sentiment) are up.
    – mxk
    Jan 15 at 13:07
  • I found what I was looking for for the S&P 500: multpl.com/inflation-adjusted-s-p-500. I haven't found a similar chart for the total stock market yet, however.
    – mxk
    Jan 27 at 14:35
  • Here is a table for VT that adjusts for US inflation for a number of periods (up to 50 years): lazyportfolioetf.com/etf/vanguard-total-world-stock-vt
    – mxk
    Jan 27 at 14:41

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