Central banks around the world continue to print money with no end in sight. For many investors, the inflation question is not “if,” but “when.” Can real-return ETFs help?
ETFs provide a truly massive range of inflation-fighting tools, including TIPS, REITs and commodities. But not everyone has the time or inclination to put these powerful building blocks into a strategy that works for them.
That’s where a trio of off-the-shelf inflation-fighting ETFs comes in. They are the IQ Real Return ETF (NYSEArca: CPI), the WisdomTree Global Real Return ETF (NYSEArca: RRF) and the SPDR SSgA Multi-Asset Real Return ETF (NYSEArca: RLY).
These products are expressly designed to provide one-stop shopping for investors looking to preserve capital while earning so-called real returns—returns over the rate of inflation.
By the way, I’m not discussing the PowerShares DB US Inflation ETN (NYSEArca: INFL) or the ProShares 30 Year TIPS/TSY Spread ETF (NYSEArca: RINF), as these securities are designed to rise and fall with the market’s expectation of inflation rather than to provide real returns.
So how do the real-return ETFs work and what do they hold? And are they ownable and tradable?
I’ll take a quick look at the three funds—CPI, RRF and RLY—with these questions in mind.
Launched in October 2009, Index IQ’s CPI is the oldest and most conservative of the bunch. Two-thirds of the fund is deployed in Treasury bills, which helps to preserve capital but doesn’t do much for returns above inflation. For that, CPI depends on roughly 10 percent stakes in U.S. equities, gold and long-dated Treasurys. It avoids commodities other than gold, and its positions in REITs are minimal.
The chart below paints CPI as the “steady Eddie” of the bunch, meaning it has provided extremely low volatility and small positive returns.
CPI has an annual fee of 71 basis points, $50 million in assets and trades at spreads of 19 basis points. That makes it ownable and tradable in my view, but I acknowledge that a 71 bp fee—$71 for each $10,000 invested—is a real drag on a low-risk, low-return strategy and that some investors require a larger and more liquid ETF.
WisdomTree’s RRF offers a different take on the space. The “Global” in the fund’s name isn’t for show: Inflation-linked bonds from around the globe dominate the fund’s 70 percent fixed-income allocation. These bonds come with higher yield than U.S. TIPS, but carry exchange rate risk too.
RRF goes whole-hog into commodities too—its 30 percent stake is well diversified across energy, precious and industrial metals, softs and livestock.
However, investors have given RRF the cold shoulder since its July 2011 launch.
The fund goes for days a time without trading a single share, and assets under management are tiny—$5 million. For me, this takes it out of consideration.
State Street’s RLY
Newcomer RLY from State Street offers a bolder approach.
A third of its exposure is in global natural resources, a play on demand-driven commodities via equities. RLY gets this exposure from a single ETF, the SPDR S&P Global Natural Resources ETF (NYSEArca: GNR).
I don’t have any problem with the concentration in this case or the fund-of-funds approach, which is also used by CPI.
In addition, RLY takes positions in broad commodity, metal and agricultural ETFs. REITS loom largely here too, while fixed income takes a backseat at only about 20 percent. RLY’s basket sounds much more volatile than staid CPI—and it is, as we’ll see below.
Despite its late-to-the-party status, the fund has attracted assets and liquidity on par with CPI, if not better, and has an annual fee of 70 basis points.
Here’s a chart of total returns for the three funds since the inception of newcomer RLY on April 25, 2012.
While this sample period is short, the striking difference in volatility between CPI and RLY seems likely to persist, judging from their portfolios.
CPI excels at capital preservation but needs a bit more juice to generate real returns over a rough 2 percent annual inflation rate. RLY has the opposite problem—plenty of upside and plenty of risk too.
In all, CPI and RLY provide viable and distinctly different options in a real-return ETF.
These ready-made products don’t work for me, but at minimum, they offer insight into inflation-fighting strategies.
At the time this article was written, the author held no positions in the securities mentioned. Contact Paul Britt at [email protected].
While no product canvasses the ETF industry perfectly, one fund checks most of the boxes.
Two new China ETFs with a different approach have bright futures.
Making the most of an Ed Yardeni call on manufacturing with index funds.
WisdomTree's new currency-hedged Japan ETFs target sectors.