When bond giant PIMCO has something to say about the fixed-income market, people listen. So, when the exchange traded fund (ETF) provider sounded the alarm on inflation, it didn’t pass without notice.
Experts at PIMCO said that in the medium- and long-term, investors should be concerned with inflation and that they should buy TIPS to mitigate it. TIPS, or Treasury Inflation-Protected Securities, are linked to the consumer price index and thus are a hedge against inflation. [‘Tis the Season for TIPS ETFs?]
But, wait. Should you be placing your TIPS order right now? Not necessarily. Most experts seem to agree that inflation isn’t a short-term concern, despite the fact that the Fed is pumping yet more money into the U.S. economy, reports Hao Li for International Business Times. But if you’re looking for clues that it’s nigh, a few things you should keep in mind as inflation drivers include:
- The fact that the U.S. dollar has fallen against other currencies, making imports more expensive. This drives consumer prices higher.
- Commodity prices have also soared in the latter half of this year.
- Wages elsewhere in the world are rising, particularly in emerging markets that export goods here. Those wage hikes have the potential to force businesses to raise prices here.
To that end, PIMCO suggests thinking about inflation-protected securities sooner rather than later. There are a growing number of ETFs with which to do this – here’s how they work. The largest TIPS fund is iShares Barclays TIPS (NYSEArca: TIP), followed by PIMCO 1-5 Year U.S. TIPS (NYSEArca: STPZ). TIP invests across all maturities, with the largest weighting in 1-5 years, while STPZ focuses solely on short-term TIPS.
Over the last three years, TIPS funds have returned an annualized 5.8%, according to Morningstar, and they are up 10.5% over the last 12 months. In the last year, they have also been less volatile as returns have risen, reports Marshall Eckbald for The Wall Street Journal.
More clues about inflation will come next week, when the consumer price index is unveiled. If you’ve ever wondered how the CPI is calculated, listen to this interesting podcast from NPR’s excellent Planet Money.
If you’re considering dipping your toes into the TIPS market, you can find all of the available options in the ETF Analyzer.
Tisha Guerrero 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.