As Inflation Heats Up, How Much Can TIPS Really Help?
August 14, 2008
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That meant companies had been reporting higher raw materials prices but not passing those higher costs along to consumers. "But now that the CPI has really jumped, inflation is bound to receive more attention from both consumers and investors," Clark said.
And he doubts that July's CPI reading will be a one-month phenomenon. But such inflation concerns are likely to be tempered somewhat over time, he added. "While some goods and services are clearly going to be more expensive, others are clearly going to be cheaper," said Clark.
Even though investors should expect and extended period of rising inflation, he says "it doesn't appear to be one of massive hyper-inflation that would most benefit an ETF" like the iShares Treasury Inflation-Protected Securities Fund (NYSEArca: TIP).
As a result, Clark's in no hurry to jump into TIPS right now, preferring other forms of high-quality bonds. But he's sticking with existing positions for clients in TIPS funds, particularly inflation-protected certificates of deposits. "They work much like a TIPs fund. But a CD will protect your principal as well, which is appealing to more-conservative investors interested in holding TIPS as part of their long-term allocation strategy," Clark said.
Ben Jacoby, a founder of Brinton Eaton Wealth Advisors, believes that at least some TIPS deserve to be in long-term investors' portfolios.
"But they offer only marginal protection," said the Morristown, N.J.-based advisor. "There are more direct and efficient ways to hedge against inflation."
Choosing some good commodities funds is probably a stronger option than just relying on TIPS, Jacoby says. For his clients, he uses the iPath S&P GSCI Total Return ETN (NYSEArca: GSP). "It's an ETN [exchange-traded note], so it guarantees you the return of the underlying index," Jacoby said. "And GSP has lower expenses than actively managed mutual funds."
He warns that the ETN's index is very aggressive with almost two-thirds of its underlying components in energy. For more conservative investors, Jacoby suggests iPath Dow Jones-AIG Commodity Index ETN (NYSEArca: DJP). "It follows a broad index with no more than any one commodity being 33%," he said. "So it tends to be less volatile than GSP."
He's also investing in the Claymore/Clear Global Timber ETF (AMEX: CUT). "What we like about timber is that even if the economy isn't doing well, you don't have to harvest the field," Jacoby said. "Also, everything you invest in will probably be counted as long-term capital gains, which is another advantage to timber."
Strategist Pinto likes gold as the best hedge against inflation right now. That's even though it has undergone a double-digit correction. Since its 52-week peak in late March, the price of SPDR Gold Shares (NYSEArca: GLD) has dropped about 20%.
"This would be a wonderful time for investors who were afraid to buy a gold fund when it was at $1,000 an ounce to start wading back into the market," Pinto said.