U.S. Markets close in 6 hrs 28 mins

Inflation Fighters: TIPS ETFs vs. Gold


ETFs tied to gold and Treasury Inflation Protected Securities have had a pretty rough time lately as the inflation that many predicted would result from central bank easing hasn’t materialized.

For example, iShares TIPS Bond ETF (TIP) is down about 6% year to date and SPDR Gold Shares (GLD) is off 24%.

Still, it may make sense for investors to keep at least a small amount of inflation protection in their portfolios.

“Our view is that investors, who include gold in their portfolio for diversification reasons and as an inflation hedge, should maintain that position, and for long-term investors a small allocation to gold could be reasonable,” wrote Russ Koesterich, iShares Global Chief Investment Strategist, in a recent commentary. [Has Gold Lost its Luster?]

And some high-profile gold ETF investors aren’t abandoning the inflation theme.

Hedge fund manager John Paulson said “the rationale for owning gold is valid,” because inflation will rise over time, Reuters report. He is the largest shareholder in GLD, the gold ETF.

TIPS, meanwhile, have been hurt by low inflation and higher Treasury yields. [Rising Rates and Low Inflation a Toxic Mix For TIPS ETFs]

Yet John Wasik at Reuters writes that TIPS funds may be a useful and less skittish way to hedge inflation than gold.

“While TIPS yields are also lackluster in a low-inflation environment, they can better protect against longer-term inflation expectations. Because they are indexed to a well-known index that tracks consumer prices, they are much less volatile and boost yield when inflation rises,” Wasik said.

He even holds TIP, the inflation-indexed bond ETF, in his 401(k) account, although he adds that so far inflation hasn’t been a problem.

“Why would I recommend a fund that’s lost money? Because I think that although short-term inflation fears have been wrong, prices will gradually accelerate across the board as the economy heats up in coming years,” Wasik wrote. “Now’s the time to buy TIPS, not when inflation is in full force. If the economy continues on its upward trajectory, prices usually follow.”

Full disclosure: Tom Lydon’s clients own TIP and GLD.

The opinions and forecasts expressed herein are solely those of John Spence, 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.