The popular iShares TIPS ETF (TIP) has nearly $25 billion indexed to a group of TIPS bonds. Many income investors utilize this fund or others like it as a hedge against the degrading effects of inflation on other investment grade bonds.
As you can see on the chart above, TIP has whipsawed in a wide range over the last year as it deals with the competing force of rising interest rates. Yet even with this drag, the fund has performed meaningfully better than a similar basket of nominal intermediate-term Treasury bonds over this time frame.
Worried about picking the right sector to play the inflation theme? A more diversified approach may involve a fund-of-funds strategy such as the SPDR SSGA Multi-Asset Real Return ETF (RLY). This ETF owns a portfolio of commodity funds, natural resource stocks, TIPS, real estate, and infrastructure companies in the form of low-cost index funds. RLY lets investors participate in the rising prices of these assets to help offset purchasing power headwinds.
Finally, the IQ Real Return ETF (CPI) is an option to evaluate as well. This ETF also utilizes the fund-of-funds strategy to construct its portfolio with a significant portion of its assets in short-term bonds with a smattering of liquid stock market indexes. A strategy of this nature is far more conservative than other options and may be suited towards those seeking shelter and income for a portion of their assets.
The Bottom Line
Many old school investors may opt to hedge their inflationary risks by owning real assets such as precious metals and property as a safety net. Nevertheless, these investments can be liquid and cumbersome to maintain over time.
An easier path may involve owning a small slice of a diversified ETF tied to real assets and inflationary securities. The goal being to help offset the negative effects of declining purchasing power in other aspects of your financial life.
This article has been republished with permission from FMD Capital.