Treasury inflation protected securities have been used as a go-to hedge for rising prices. However, there are a number of other assets and exchange traded funds investors can utilize to shield against inflationary pressures.
“A lot of people think TIPS are a magic bullet for their portfolio,” Greg Ghodsi, managing director of investments at 360 Wealth Management Group, a unit of Raymond James Financial Inc., said in a Wall Street Journal report.
However, after investors pushed up TIPS prices to protect their portfolios from inflation, the securities now look pricey.
“We felt there had been a run-up in price, and it didn’t look like there was a lot of value compared to a Treasury,” Ghodsi added.
Recently, the TIPS-related ETF has been underperforming Treasuries with similar maturities. For instance, the iShares TIPS Bond ETF (NYSEArca: TIP) has declined 1.0% over the past three months, whereas the iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF) rose 2.1%.
A diversified investment approach is the best way to hedge inflation. According to IndexIQ, a portfolio of TIPS, along with commodities, short-term Treasuries and stocks provided more effective inflation protection than any single asset class on its own. [ETF Options to Hedge Against Falling Prices, Low Inflation]
Jared Kizer, director of investment strategy at BAM Alliance, points out that during inflationary periods, prices on commodities such as oil, metals and food typically rise, but there is no guarantee when trying to single out which commodity will hold up. Consequently, Kizer suggests a broad diversified commodity fund.