Inflation is starting to pick up and people should begin to hedge accordingly. For instance, investors can take a look at Treasury inflation protected securities, along with related exchange traded funds, to help keep rising consumer prices from eating away at their fixed-income portfolios.
The index for personal consumption expenditures rose to 1.8% in May, the highest level since October 2012, writes Aaron Levitt for Investopedia.
American consumers have noticed the difference at the grocery store with food prices up 2.1% and at the gas station with energy costs up 5.8%.
The Labor Department stated that inflation rose an adjusted 2.1% over the past year, overshooting the Federal Reserve’s annual target of 2%.
For fixed-income investors, an increase in inflation translates to lower real, or inflation-adjusted, returns. If inflation continues to rise and current yields stay the same, an investor’s real return could drop into the negative.
However, investors can utilize TIPS ETFs to hedge against future inflationary pressures. The securities’ adjust their value along with inflation as measured by the Consumer Price Index. TIPS ETFs also complement a core fixed-income position as many broad bond funds exclude TIPS.
The iShares TIPS Bond ETF (TIP) , with $13.1 billion in assets under management, is the largest offering in the space. TIP has an effective duration of 7.66 years, a 3.86% 30-day SEC yield and a 0.20% expense ratio. [Investors Look to TIPS ETFs to Hedge Against Inflation]
Additionally, the Schwab U.S. TIPS (SCHP) has an effective duration of 7.64 years and a 7.11% 30-day SEC yield. SCHP also comes with a cheap 0.07% expense ratio.
Along with other fixed-income funds, TIPS ETFs are susceptible to changes in the interest rates and could underperform in a rising rate environment. Consequently, investors can go down the yield curve to hedge against rate risk. For instance, the PIMCO 1-5 Year U.S. TIPS ETF (STPZ) and Vanguard Short-Term Inflation-Protected Securities ETF (VTIP) provide short-term TIPS options.
VTIP has a 2.5 year duration, a -1.17% 30-day SEC yield and a 0.10% expense ratio. STPZ shows a 2.57 year duration, a 3.65% 30-day SEC yield and a 0.20% expense ratio.
With inflation beginning to inch higher, investors should being to think about ways to hedge their exposure. [Increasing Demand to Hedge Inflation with TIPS, ETFs]
For more information on Treasury Inflation Protected Securities, visit our TIPS category.
- exchange traded funds