WisdomTree

The new ETF WisdomTree has in the hopper, the WisdomTree Real Return Fund (NYSEArca: RRF), seeks to give investors long-term returns above the rate of inflation.

Liquidity has flooded the U.S. market, giving rise to investor fears that inflation will soon become an issue. This new fund aims to give investors another way to hedge it, explains Cinthia Murphy for Index Universe.

The fund’s primary goal is for its portfolio to have an average effective duration of two to 10 years, and maturity lengths will vary. The longer the duration of the securities, the more susceptible the fund is to interest rate fluctuations and volatility. (Read on about ways to hedge inflation with ETFs).

RRF will also deliver exposure to commodities, such as energy, precious metals and agriculture. RRF will compete directly with IndexIQ’s newest offering, IQ CPI Inflation Hedged (NYSEArca: CPI). (More about CPI can be found here).

Inflation fears have fueled an increase in products designed to hedge it. PIMCO recently launched the first short-term TIPS ETF, PIMCO 1-5 Year U.S. TIPS Index (NYSEArca: STPZ), and other providers also have TIPS funds. (How TIPS work).

For more stories about TIPs, visit our TIPs category.

• iShares Lehman TIPS Fund (NYSEArca: TIP)

• SPDR Barclay TIPS ETF (NYSEArca: IPE)

The efforts of the U.S. government to salvage the economy has led to a deflation of the U.S. dollar. Gary Gordon for ETF Expert says that any investor must consider going forward that there are ways to hedge against inflationary pressures that stem directly from less valuable dollars in circulation.

When it comes to reasonable-risk returns to overcome inflation/dollar devaluation, Gordon notes the appeal of precious metals, thanks to their relatively lower risk. SPDR Gold Shares (NYSEArca: GLD) carries a risk grade of 76, compared to the S&P 500 which gets a grade of 83.

Even though gold is around $1,000 per ounce, and the other precious metals may look enticing, there are still reasons to like gold. (Is gold overheated?)

That being said, don’t forget about silver, which is outperforming gold these days. iShares Silver Trust (NYSEArca: SLV) is up 43.8% year-t0-date. (Why silver is outperforming).

No rally’s continuance is guaranteed. Watch the trend lines and have an exit strategy for when gold decides it’s done. (How to follow trends).

For more stories about precious metals, visit our precious metals category.

John Spence of Market Watch said that taxable bond ETFs brought in the biggest gains in assets in September. Year-to-date,  taxable bond ETFs have brought in about $26.7 billion of new assets, which makes it the most popular ETF category so far in 2009. (How to use ETFs to diversify away from the dollar).

Not all bond ETFs are created the same.  The iShares Barclays TIPs Bond ETF (NYSEArca: TIP) has been one of the most popular, doubling in size to boast nearly $16 billion in assets.  What makes TIPS so attractive is that they enable investors to hedge against inflation because their returns are based on the rate of inflation. (How TIPS work).

Other TIPS ETFs include:

• PIMCO Broad U.S. TIPS (NYSEArca: TIPZ)
• PIMCO 15+ Year U.S. TIPS (NYSEArca: LTPZ)
• PIMCO 1-5 Year U.S. TIPS (NYSEArca: STPZ)
• SPDR Barclays Capital TIPS (NYSEArca: IPE)

Another class of bond ETFs that has seen nice growth is investment-grade corporate bond ETFs.  Take a look at the iShares iBoxx Investment Grade Corporate Bond Fund (NYSEArca: LQD), which has about $13 billion in assets, a yield of 5.3% and is up 8.3% year-to-date.

In addition to bond ETFs seeing growth and an inflow of assets, commodity ETFs and emerging market ETFs have as well, thanks much to risk appetite coming back into the marketplace. (Five ways to fight inflation with ETFs).

For more stories on bond ETFs, visit our bond ETF category.

For full disclosure, Tom Lydon’s clients own shares of LQD.

Kevin Grewal contributed to this article.

According to John Spence for The Wall Street Journal, industrywide, ETF assets have topped $750 billion  with year-to-date inflows of nearly $56.3 billion.  A large portion of those assets are heading toward ETFs that track the international markets, bonds and commodities. All three classes offer protection from either inflation, a falling dollar or both. (For more stories on commodities ETFs, visit our commodity ETF category.)

Emerging Markets. Emerging markets are the talk of the town. One of the benefits of investing in emerging markets, aside from diversification, is the “dollar kicker” when assets denominated in foreign currencies are converted back to U.S. dollars. Investors get the benefit of differences between two currencies. (Watch Tom on CNBC to learn more about investing overseas).

One of the top selling international ETFs is the iShares MSCI Emerging Markets Index Fund (NYSEArca: EEM) which has nearly $37 billion in assets and is up 65.4 % year-to-date.

Also consider more narrowly focused emerging market ETFs, too, especially if your risk tolerance is higher. Our Ultimate Guide to the BRIC ETFs outlines the options available to investors when it comes to Brazil, Russia, India and China, and more ideas can be found in our emerging markets category.

Bond ETFs. In the bond arena, the iShares Barclays TIPS Bond Fund (NYSEArca: TIP) has been popular because it offers investors protection against inflation.  The ETF has $16.9 billion in assets and is up 8.6% year-to-date. (All of your TIPS questions are answered here).

PIMCO also has some newly launched TIPS funds: PIMCO 15+ Yr. US TIPS Index Fund (NYSEArca:LTPZ) and PIMCO Broad US TIPS Index Fund (NYSEArca: TIPZ). (Three ways TIPS help hedge inflation).

Commodities. As for commodities ETFs, many have been drawing assets and attention.  The SPDR Gold Shares (NYSEArca: GLD) boasts $37.5 billion in assets and is up 19.5% year-to-date.  Commodities ETFs have really felt the heat this year as the Commodity Futures Trading Commission (CFTC) has stepped up regulation and is expected to impose position limits on certain ETFs soon. (Is the gold rally overheated?)

As with global ETFs, there are commodity ETFs that go from broad to narrow. Learn how to pick your spots here.

The Dollar’s Short Side. PowerShares offers two ETFs that seek to reflect the performance of the U.S. dollar long or short. As the dollar heads lower, investors might find the PowerShares DB U.S. Dollar Bearish (NYSEArca: UDN) appealing. It’s up 8.3% year-to-date.

Dollar hedging can also be done with ETFs that track other currencies. Our currency special report has a list of the available ones out there, as well as explanations of how they operate.

As with any sector or asset class, always have a plan in place for both entry and exit. No trend goes on indefinitely, so by having a strategy and being prepared to act when necessary, you can give yourself the opportunity to be in for a potential long-term uptrend and out in time to protect yourself on the downside. (How to follow trends).

Kevin Grewal contributed to this article.

According to Don Dion for The Globe and Mail, he’s chosen his top five ETFs based on the fact that he feels they capture their theme, provide liquidity and exploit the advantages of the ETF model. This is by no means a conclusive list – there are many, many worthy ETFs out there.

These five ETFs address important themes in the financial world of today:

Biotech. iShares Nasdaq Biotechnology (NasdaqGM: IBB) is up 11% year-to-date. Biotechs include many start-up companies that burn out, but a lucky few do strike it rich. Instead of shifting through all the possible companies, the ETF offers a great way to pick up the sector.

TIPs. iShares Barclays TIPS Bond (NYSEArca: TIP) is up 7.1% year-to-date. This fund tracks securities that range in duration from one to 20 years. Indiividual TIPs bonds are taxed on inflation adjustment and TIP distributes inflation-adjustment as income.

India. WisdomTree India Earnings (NYSEArca: EPI) is up 85.8% year-to-date. The fund offers access to the Indian equity market while allowing for the limitations that foreigners might have on investing. Potential investors should note that emerging market equities tend to be more volatile.

Gold. SPDR Gold Shares (NYSEArca: GLD) is up 15.4% year-to-date. Gold has been the talk of the markets these days. Buying gold is a good way to diversify a portfolio. GLD tracks the price of gold stockpiles, so investors won’t be tracking the price through derivative holdings.

S&P 500. SPDRs S&P 500 (NYSEArca: SPY) is up 16.7% year-to-date. The fund has been providing low-cost exposure to the S&P 500. SPY is a good proxy for the market as a whole and Dion believes it to be a must-have fund for any well-rounded ETF portfolio.

Max Chen contributed to this article.

For full disclosure, Tom Lydon’s clients own shares of GLD and SPY.

Andrew Leckey of the Tribune Media Services states that from 1941 to 1947, when inflation averaged 7.5%, the top-performing stock segments were U.S. small-cap value stocks, up 28%; micro-cap stocks, up 22%; and large value stocks, up 17%, and it is not unreasonable to expect the same.

For this reason he suggests looking at the Vanguard Small Cap Value (NYSEArca: VBR), the iShares Russell Microcap Index (NYSEArca: IWC) and the Vanguard Value ETF (NYSEArca: VTV).

Another class to consider when dealing with inflation is the Treasury Inflation Protected Securities (TIPS), which pay a steady yield and adjust as the U.S. Consumer Price Index moves.  A good way to access TIPS is through the iShares Lehman TIPs Bond (NYSEArca: TIP), PIMCO Broad U.S. TIPS (NYSEArca: TIPZ) or SPDR Barclays Capital TIPS (NYSEArca: IPE)

Gold and silver are also popular and useful inflation hedges.

With the proper strategy and utilization of some of the previously mentioned ETFs, one can capitalize on an opportunity.

For more stories on bond ETFs, visit our bond ETF category.

Kevin Grewal contributed to this article.

What are TIPS?

TIPS are Treasury Inflation-Protected Securities. TIPS are similar to regular Treasury bonds in that they have the same credit risk – effectively none – and they’re issued by the government. But the difference is how they pay the coupon. “If you buy $100 at inception and the rate of inflation is currently 2% for 10 years (the date of maturity), the principal will grow 2% each year,” Caltagirone says.

When were they created?

They were created in the United States in 1997. It was something the Treasury had thought about doing for awhile, Caltagirone says. We’re far from the first country to offer them – the United Kingdom has had them since the 1980s. But the U.S. market for TIPS is now the largest in the world.

Why were they created?

The main reason TIPS were created was to give the public a debt instrument that is directly linked  to the rate of inflation. “No other investment where it moves up and down with whatever inflation is measured at,” Caltagirone says.

The Treasury issued them for two reasons:

• There was demand for them
• They’re incentive for the Treasury to keep inflation in check. If inflation runs rampant, the Treasury knows it will have to pay more and more to TIPS holders. “It forces them to take inflation seriously,” says Caltagirone. “They’re a check and balance for the Federal Reserve and the Treasury.”

What’s the TIPS market right now?

It’s around $550 billion. Total U.S. debt is around $12 trillion, making TIPS about 5% of the total U.S. debt. The market for TIPS has grown, Caltagirone notes, and it could grow even more.

TIPS, being relatively new instruments, have not yet been tested in a period of stagflation. Will they hold up if this happens?

In theory, Caltagirone says, TIPS would hold up in a period of stagflation – that is, high inflation, low growth. “In the late ’70s, anything over five years of maturity suffered and the yields went up sharply. Inflation is the #1 enemy of regular bond that don’t have inflation protection.”

Because TIPS strip out the price risk, the theory is that they’d hold their value better.

What are the risks of TIPS?

In short, the risk is that you could buy some TIPS and inflation doesn’t pan out like you expected it might. “If inflation doesn’t pan out,” Caltagirone says, “then you’re stuck with the lower yield.”

If a period of deflation is entered, then it cuts into your yield. The worst-case scenario is deflation; the best-case is stagflation.

What strategies can I use when it comes to TIPS?

Caltagirone says that most investors should think of TIPS as a strategic position – not one necessarily of buy-and-hold, but held for a period of time, such as one, two or three years. Tactically trading TIPS could shortchange investors of their rewards: “The benefits of them get felt out over longer periods of time.”

That’s because, Caltagirone says, inflation is very noisy in the short-term since it’s measured month-to-month. Once that’s all smoothed out, you can see where the overall trajectory is headed.

Where do TIPS fit in with other inflation hedges?

One benefit of TIPS, Caltagirone notes, is that they’re directly linked to inflation by contract. Commodities can be a useful hedge against inflation, but they’re not contractually obligated to deliver on that, so there’s no guarantee. “[Commodities] tend to drive inflation in the short-term, but over the long-term they’re not all that correlated with inflation.”

What TIPS ETFs are available?

• PIMCO Broad U.S. TIPS (NYSEArca: TIPZ)
• PIMCO 15+ Year U.S. TIPS (NYSEArca: LTPZ)
• PIMCO 1-5 Year U.S. TIPS (NYSEArca: STPZ)
• iShares Barclays TIPS Bond (NYSEArca: TIP)
• SPDR Barclays Capital TIPS (NYSEArca: IPE)

Allianz’s Pacific Investment Management Co. (PIMCO) says that TIPs often lead to missed opportunities and hidden costs, reports Ian Salisbury for The Wall Street Journal. TIPs adjust their principal to match rising prices, or in other words, they are Treasury bonds that hedge against inflation.

TIPs have rallied this year on worries over inflation, which could arise as a result of the copious government stimulus efforts. PIMCO has filed with the Securities and Exchange Commission (SEC) to launch TIPs-related ETFs in an attempt to get in on the investor interest, and all four would be index funds.

PIMCO’s paper, written by John Cavalieri, Gang Hu and Mihir Worah, points out four areas of inefficiency in the TIPS market that could be corrected through proper management during specific segments of the year or changes in the shape in the yield curve:

• Passive investors can incur larger transaction fees than active investors in the TIPs market, and passive investors won’t be able to time transactions during the day to take advantage of market imbalances that could occur at the end of the day.
• TIPs ETFs rebalance periodically and active investors can capture alpha by purchasing securities at artificially depressed prices after rebalancing.
• TIPs auctions create market inefficiencies. The funds can lose out on a chance to trade in periods when supply and demand are out of whack.
• TIPs prices also shift according to the seasonal patterns in the underlying inflation index.

Vanguard agrees with this assessment and is in favor of active management in TIPs funds. Barclays, however, dismissed Pimco’s findings, stating that ETFs trade less frequently than active funds, which lowers costs. Furthermore, Barclay insists that costs incurred are easier to judge since they are rolled into bid-and-ask spreads that investors see upon trades.

According to Robert Huebscher for Advisor Perspectives, active managers won’t be able to outperform the passive TIPs ETF in net fees, and in an attempt to outperform passive funds, active managers will also be more inclined to take excessive risks. Huebscher also notes that PIMCO may be more biased toward active management since a major chunk of the company’s revenue comes from actively managed bond portfolios.

• SPDR Barclays Capital TIPS (IPE): up 6.3% year-to-date

• iShares Lehman TIPS Bond (TIP): up 5% year-to-date

For more information on Treasury inflation protected securities, visit our TIPs category.

Max Chen contributed to this article.

The major consequence is inflation.  The likelihood that the government will stop printing money is not high at the moment – no one wants to cut off economic aid prematurely. But printing could have an unwanted side effect: inflation, states Martin Denholm of Smart Profits Reports.

The following are ways to soften the blow of inflation:

• Take a look at the grandfather of inflation protection, gold. It can be accessed through the SPDR Gold Trust (GLD)

• Another hedge could be found in inflation adjusted treasuries, represented by the iShares Lehman TIPs Bond (TIP). These are Treasury bonds, essentially, that hedge against inflation.

• Energy equities such as the Vanguard Energy ETF (VDE). Energy is a factor in the cost of nearly anything you can think of, and oil and gas are priced in U.S. dollars. As the dollar weakens, energy becomes more appealing around the world.

• Through traditional commodities such as a broad-based commodity fund such as the PowerShares DB Commodity Index Tracking (DBC). Commodities tend to go on an uptrend in periods of inflation.

Before you act, though, have a strategy and watch the trend lines in order to see where opportunities are actually taking place.

For more stories on commodities, visit our commodities category.

Kevin Grewal contributed to this article.

TIPS can be one way to stave off the devaluation on borrowed money that comes from inflation, according to Steve Chiotakis for Marketplace. TIPs are bonds that have an increase or decrease in its principal based on the Consumer Price Index.

Reporter Jeremy Hobson says the Treasury Department will be announcing a boost in sales of TIPS.

TIPS have been gaining more attention after a series of weak Treasury auctions that have been followed by successful TIPS auctions. China has also been complaining about the effects of inflation in the United States, and their government is interested in buying more TIPS to protect themselves. As a result, the Treasury department will boost the sale of the bonds, say Rob Copeland and Maya Jackson Randall for The Wall Street Journal.

TIPs may be beneficial for investors after the U.S. government’s borrowing spree, but it may not be so great for the taxpayer. One strategist calculated that without inflation, 10-year TIPS are yielding 1.82%, whereas the 10-year Treasury is yielding 3.75%.

• iShares Barclays TIPS Bond (TIP): up 3.2% year-to-date; yield is 4.4%

For more information on Treasury inflation-protected securities, visit our TIPs category.

For full disclosure, Tom Lydon’s clients own shares of TIP.

Max Chen contributed to this article.