Many are betting that inflation will skyrocket in the coming years as the United States continues to increase its deficit to historic heights. John Paulson, the man who scored about $20 billion for his clients during the housing crash, has been buying up gold for that reason. A safer bet may be had in TIPS exchange traded funds (ETFs).
Alexander Green of Investment U reveals some interesting data on the tentative situation regarding the U.S.’s fiscal policy.
- Over the next decade, Medicare will cost an estimated $1 trillion.
- Federal spending increased 58% faster than inflation during George W. Bush’s presidency.
- This year’s federal budget deficit is estimated at a mind-boggling $1.56 trillion.
- The federal debt is estimated to hit $18.5 trillion by 2020. This was before the passage of the health care reform bill.
- Unfunded government liabilities covering Social Security, Medicare and Medicaid are estimated at $108 trillion – eight times annual GDP.
- Moody’s has threatened to downgrade the AAA rating of U.S. sovereign debt.
One way out of this tremendous debt would be for the government to close the budget gap using inflationary measures, thereby repaying its debt with increasingly worthless currency. Green is bullish on this idea because he doesn’t believe the government would risk the kind of deflationary spiral that Japan endured over the past twenty years. [TIPS and ETFs: Your Questions Answered.]
If you’re of like mind, Treasury Inflation-Protected Securities (TIPS) offer one way to hedge against inflationary risk. You can invest directly in several ways, including via the iShares Barclays TIPS Bond Fund (NYSEArca: TIP). We’ve listed even more options below. [ETFs to Shelter Against a Weak Dollar.]
With TIPS, you receive interest every six months while your principal increases at the rate of inflation, as measured by the Consumer Price Index. In addition, the interest payments are exempt from state and local taxes. PIMCO notes that to determine where you should invest along the TIPS curve, consider the following:
- The level of volatility you’re willing to tolerate. Shorter maturities are less volatile than longer ones because they’re less sensitive to price.
- Assess the level of real yields offered along the TIPS curve; this is more important to long-term investors.
- The likelihood of changes in the level of real yields. These can cause price changes in TIPS, which is the primary driver of returns in the short-term.
For more stories on TIPS, visit our TIPS category.
- PIMCO 15+ Year U.S. TIPS Index (NYSEArca: LTPZ)
- PIMCO 1-5 Year U.S. TIPS Index (NYSEArca: STPZ)
- SPDR Barclays Capital TIPS (NYSEArca: IPE)
- PIMCO Broad U.S. TIPS Index (NYSEArca: TIPZ)
- iShares Barclays TIPS Bond Fund (NYSEArca: TIP)
Sumin Kim contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, 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.