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.
For instance, the PowerShares DB Commodity Index Tracking Fund (NYSEArca: DBC) is the largest commodity-related ETF and tracks a broad basket of the 14 most heavily traded commodities. The iShares GSCI Commodity-Indexed Trust (NYSEArca: GSG) includes a broader group of 24 commodities, replicating the S&P GSCI Total Return Index.
Potential investors, though, should be aware that these two broad commodity funds track the derivatives market and not the commodities’ spot price, so there are risks associated with futures trading. Kizer also notes that physically backed commodity ETFs provide purer exposure, but they are limited to precious metals. Popular physical ETF options include the SPDR Gold Shares (NYSEArca: GLD) and iShares Silver Trust (NYSEArca: SLV).
In the equities space, some sector stocks and ETFs tend to hold up during inflationary periods. Ghodsi recommends stock funds like the Energy Select Sector SPDR (NYSEArca: XLE) and iShares S&P Global Materials (NYSEArca: MXI). Moreover, Ghodsi warns that the consumer discretionary sector tend to underperform when inflation rises. [Energy ETFs Could be Ready to Rebound]
Lastly, the IQ Real Return ETF (NYSEArca: CPI) provides a multi-asset inflation hedging approach. Specifically, the ETF includes exposure to short-term Treasuries, short contracts on Treasury bonds, the S&P 500 and Russell 2000.
For more information on the inflation, visit our inflation category.
Max Chen contributed to this article.
Full disclosure: Tom Lydon’s clients own shares of GLD.