The ability to fine tune your portfolio continues to increase with more and more ETFs coming available, helping you to achieve your overall investment goals. “Real-return” ETFs largely invest in cash products and bonds, but also some other assets. The aim of these ETFs is to provide a return greater than the inflation rate. While this may not always occur, the fund does typically act as an inflation hedge. These funds distinguish themselves from focused bond or money market ETFs by investing in a broader range of products which include bonds and cash, but also potentially stocks, commodities, currencies or other ETFs [see Free Report: How To Pick The Right ETF Every Time].The Contenders
The IQ Real Return ETF (CPI) aims to provide a return greater than the rate of inflation as measured by the Consumer Price Index. The ETF has been trading since October 2009, has an expense ratio of 0.48% and does approximately 13,000 in daily volume. The ETF issuer is IndexIQ, a firm founded in 2006 with a total of 11 U.S.-listed ETFs [try our Free ETF Head-To-Head Comparison Tool].
The Global Real Return Fund (RRF) seeks total returns that exceed the rate of inflation over the long-term. RRF has been trading since July 2011, has an expense ratio of 0.60% and does less than 700 in daily volume. The fund is issued by WisdomTree, which was founded in 1988 and has a total of 47 U.S.-listed ETFs.Where They Fit
These ETFs will appeal to investors who are looking for returns that compensate them for inflation. While the returns may vary, these funds typically at least partially hedge inflation, but may also provide a real return (return greater than inflation rate).
CPI is a low volatility fund, and will therefore appeal to investors looking for an inflation hedge with less risk attached to it. The ETF has a 200-day volatility of 2.78%, while RRF on the other hand is quite volatile, with a 200-day volatility of 34.01%. RRF aims for inflation protection, but it’s more suited to investors looking for big daily swings or who don’t mind volatility [see Inflation ETF Special: 25 ETF Ideas To Fight Rising Prices].Under the Hood
CPI is focused in the U.S. and invests in other ETFs and REITs. Nearly 70% of its funds are invested in the iShares Barclays Short Treasury Bond (SHV) and SPDR Barclays 1-3 Month T-bill (BIL). Other ETF holdings include the SPDR S&P 500 (SPY) and PowerShares DB Gold (DGL). These four ETFs compose about 90% of the total CPI portfolio. The ETF has 11 holdings, as of April 18, 2013. CPI is for investors looking to hedge or beat U.S. inflation, as it is linked to the US Consumer Price Index. Therefore, while this may be of benefit to international investors, it is in no way directly linked to foreign inflation rates.
RRF invests globally, although the top holdings are within the U.S. The top three holdings, of roughly 6% each, are US Treasury Bonds and Notes. Currently there are 42 holdings within the ETF–many more if you count the multiple expiry months of the varying futures contracts–with global bonds comprising 71.22% and commodities 28.78%. Therefore, this fund is geared to hedge or attempt to beat a more global inflation level. U.S. and global investors may benefit from the fund, but since it is not linked to any specific country’s inflation rate, it may not provide a real return in the investors’ home country.Expenses and Performance
There are few direct competitors in this ETF niche. Therefore, the expense ratios of the two must be compared against each other. CPI is cheaper at 0.48% than RRF at 0.60%; however, RRF can be traded commission-free on E*Trade. SPDR Multi-Asset Real Return ETF (RLY), the only other direct-competitor ETF in the space, has an expense ratio of 0.70%.
RRF has a limited performance history given its inception in mid-2011. RRF returned 2.06% in 2012 and CPI returned 1.28%. Keep in mind that CPI is less volatile than RRF [see Low Volatility Portfolio].
Over the trailing three-year period, the total return for CPI is 4.73%, as of Aril 18 2013. The price of the ETF has been in slow uptrend since its inception through to early 2013.
RRF fell more than 10% shortly after its inception, but from 2012 through to early 2013 has ranged between approximately $49 and $43.30.Bottom Line
When deciding between the two funds, there are a few major factors to consider. CPI is U.S.-focused, low volatility and has a lower expense ratio. RRF is a more diversified, investing in a large number of global bond and commodity products. While this may have some benefits, it also means the “real-return” is not linked to an investor’s specific inflation rate. This fund is more volatile, has a shorter track record and a slightly higher expense ratio (free with E*Trade, though).Other Options
Another option in this space is the SPDR Multi-Asset Real Return ETF (RLY). It invests in other ETFs in an attempt to achieve a total real return. It began trading April 2012, has an expense ratio of 0.70% and daily volume of approximately 35,000.
Investors may also consider inflation linked or protected bond funds; these are ETFs that invest in treasuries and bonds, where the coupon payments are adjusted for inflation.
The Barclays TIPS Bond Fund (TIP) began trading in 2003, has an expense ratio of 0.20% and does in excess of 1 million shares daily. It is focused on U.S. bonds and notes.
The Global Inflation-Linked Bond Fund (GTIP) began trading in May 2011, has a 0.40% expense ratio and does approximately 10,000 in daily volume. It invests in a broad range of global bonds and notes (including U.S.).
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Disclosure: No positions at time of writing.
- inflation rate