January 16, 2009 at 3:00 pm by Max Chen
As Capitol Hill freely throws more money at our economic predicament, inflation could soon be a new problem of the day and a certain type of exchange traded fund (ETF) could be right for you if this is a concern.
Inflation at Lows. Although inflation is at lows not seen since 1954, the government’s recent fiscal and monetary policies could likely stir it up again. With consumer prices at lows and infrastructure projects waiting in the wings, interest rates could be pushed up, writes Zoe Van Schyndel for The Motley Fool.
ETFs that invest in Treasury inflation-protected securities (TIPS) provide inflation protection, its namesake, and modest returns.
How They Work. It is the principal value of TIPS that increases along with inflation and decreases along with deflation. When the bond matures, the investor receives the greater value of either the adjusted principal or original principal. Since TIPS interest rates is applied to the adjusted principal, its paid interest rates rises with inflation and drops with deflation.
It is noted that inflation adjustment to principal and interest payments on TIPS are both taxable as ordinary income, which may suggest TIPS funds are suitable retirement investment tools.
- iShares Barclays TIPS Bond ETF (TIP): up 0.9% year-to-date
- SPDR Barclays Capital TIPS ETF (IPE): up 3.2% year-to-date
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