“Our study found that for an investor that wishes to achieve a given real return while minimizing the deviation of his portfolio from inflation on the downside in any given period, the best allocation usually did not involve investing in domestic equities. In fact, the best allocation consisted of some combination of government bills or one-month CDs, government bonds, some gold, some oil and some emerging market equity,” according to an IndexIQ and Mainstay Investments report.
“We found that although inflation-protected bonds may be good instruments for hedging inflation when owned in isolation, they have higher volatility than a portfolio of assets and seem to be less important when combined with a group of other assets,” the IndexIQ and Mainstay Investments researchers added.
Moreover, the Real Return ETF may be a good alternative option to cash or money market funds as the Securities and Exchange Commission is expected to implement a round of new rules in mid-October that could change the way the $2.7 trillion industry works, potentially triggering billions in outflows from these traditionally safe investments and opening up opportunities in cash-alternatives like ultra-short-duration bond ETFs.
The SEC’s new rules will allow the value of shares on prime institutional money-market funds, which invest in short-term corporate debt and are geared toward large investors, and institutional municipal money-market funds to fluctuate along with current market prices of their underlying holdings, essentially “breaking the buck” that so many have relied upon – these money market funds have traditionally sought a stable net asset value, or NAV per share, of $1.00.
CPI may act as a substitute to traditional money market funds as the Real Return ETF includes a hefty 51% tilt in Treasury bonds with less than 1 year to maturity, 24% to 1-3 month T-Bills, 5% to 7-10 year Treasuries and 5% to 3-7 year Treasuries.