Inflation is starting to pick up and people should begin to hedge accordingly. For instance, investors can take a look at Treasury inflation protected securities, along with related exchange traded funds, to help keep rising consumer prices from eating away at their fixed-income portfolios.
The index for personal consumption expenditures rose to 1.8% in May, the highest level since October 2012, writes Aaron Levitt for Investopedia.
American consumers have noticed the difference at the grocery store with food prices up 2.1% and at the gas station with energy costs up 5.8%.
The Labor Department stated that inflation rose an adjusted 2.1% over the past year, overshooting the Federal Reserve’s annual target of 2%.
For fixed-income investors, an increase in inflation translates to lower real, or inflation-adjusted, returns. If inflation continues to rise and current yields stay the same, an investor’s real return could drop into the negative.
However, investors can utilize TIPS ETFs to hedge against future inflationary pressures. The securities’ adjust their value along with inflation as measured by the Consumer Price Index. TIPS ETFs also complement a core fixed-income position as many broad bond funds exclude TIPS.
The iShares TIPS Bond ETF (NYSEArca: TIP), with $13.1 billion in assets under management, is the largest offering in the space. TIP has an effective duration of 7.66 years, a 3.86% 30-day SEC yield and a 0.20% expense ratio. [Investors Look to TIPS ETFs to Hedge Against Inflation]