Count hedge fund legend David Einhorn among the professional investors that are preparing for inflation to rear its ugly head again. Investors can follow suit with ETFs such as the FlexShares iBoxx 3-Year Target Duration TIPS Index Fund (NYSEArca: TDTT).
Treasury Inflation-Protected Securities (TIPS) are popular among fixed-income investors looking to protect against the scourge of inflation and ETFs make it easier to access TIPS. TDTT has a stablemate to consider, the FlexShares iBoxx 5Yr Target Duration TIPS ETF (NYSEArca: TDTF). The fund tracks the iBoxx 5-Year Target Duration TIPS Index.
“David Einhorn’s Greenlight Capital has been positioning his portfolio in anticipation of rising inflation. The hedge fund has recently added to a number of large equity stakes poised to benefit from higher prices in different corners of the economy,” reports Yun Li for CNBC. “The inflation bet is based on the Federal Reserve’s commitment to keeping interest rates near zero, which would mean letting inflation rise at least to their 2% target, Greenlight said in an investor letter obtained by CNBC.”
Time for TDTT?
TDTT would be particularly useful in an environment where inflation data exceeds forecasts, meaning investors should monitor the breakeven inflation rate.
While inflation expectations may remain muted now, investors are already looking into TIPS as a hedge against rising prices ahead. TIPS returns are affected by interest-rate risk as well as changes in the principal value when the Consumer Price Index moves. TIPS will adjust their principal value upward in response to a higher CPI, but the reverse occurs during periods of deflation.
Massive monetary stimulus around the world could highlight the case for ETFs like TDTT and TDTF.
“As the economy embarked on its road to recovery, consumer prices have started to bounce back a bit after dropping drastically during the pandemic. In the 12 months through June, the consumer price index climbed 0.6% after gaining 0.1% in May. The market’s inflation expectations have also edged higher in the wake of a global fiscal stimulus,” according to CNBC.
TIPS are a type of Treasury security that is indexed to inflation as a way to shield investors from the negative effects of inflation. The securities’ par value rises with inflation as measured by the Consumer Price Index while the interest rate remains fixed. TIPS also offers investors another layer of diversification as many aggregate bond funds exclude TIPS from their holdings.
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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.