Gold, TIPS ETFs Reward Big on Inflation Trade

October 11th at 12:00pm by John Spence

ETFs pegged to gold and Treasury Inflation Protected Securities have delivered the top risk-adjusted returns over the past five years on fears central bank easing would debase currencies, according to a report.

However, investors have been of two minds on these asset classes recently in the wake of the Federal Reserve launching QE3. [Central Banks Will Devalue Currencies, Gold ETF Bulls Say]

For example, investors have been piling into gold ETFs. The largest precious metal ETF, SPDR Gold Shares (NYSEArca: GLD), has raked in $3 billion since the end of August. [Gold ETF Bullion Holdings at Record After $3B Monthly Inflow]

About 191 metric tons of gold have flowed into related ETFs since the end of July, and buying in gold exchange traded products totaled nearly $8 billion in the third quarter, the highest quarterly inflow in over two years, MarketWatch reports. [Gold Rush is On in ETFs]

Conversely, investors have yanked $840 million from iShares Barclays TIPS Bond Fund (NYSEArca: TIP) since the end of August, according to IndexUniverse ETF flow data.

The outflows suggest investors are locking in profits after the TIPS ETF rallied to all-time highs, or see deflation as a greater threat than inflation. Additionally, the recent selling could mean investors are nervous that TIPS could be hurt if interest rates rise. [Deflation Warning? – Investors Dumping TIPS ETFs]

“Gold and TIPS are the most liquid way to get exposure to inflation,” said Michael Mullaney at Fiduciary Trust in a Bloomberg News report Wednesday. “The volatility in gold and TIPs will remain low going forward as the ugly head of inflation will emerge, and we will see a steady increase in gold demand.”

The gold ETF had a total return of 134% over the past five years, the best among the 10 biggest ETFs, and the third-lowest volatility, according to Bloomberg. The TIPS ETF had the lowest volatility and the third-highest total return.

SPDR Gold Shares

iShares Barclays TIPS Bond Fund

Full disclosure: Tom Lydon’s clients own TIP and GLD.

The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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