Investors are increasingly looking for ways to hedge against persistent inflation, with Treasury Inflation-Protected Securities (TIPS) offering attractive yields despite recent volatility. While TIPS are a primary tool, experts also recommend diversifying with commodities, infrastructure funds, and equities to build a resilient portfolio.
The current economic climate, marked by inflation exceeding central bank targets and rising consumer concerns, necessitates a strategic approach. Assets that can pass on costs or benefit from price adjustments, such as commodities and infrastructure, are gaining attention as potential inflation buffers.
Don't Let Inflation Bite: Strategic Ways to Hedge Your Investments
As consumer prices continue to be a key economic indicator, investors are seeking robust strategies to safeguard their portfolios against rising inflation. From Treasury Inflation-Protected Securities (TIPS) to commodities and infrastructure funds, a multi-pronged approach is being recommended to navigate the current economic landscape.
Key Takeaways
- Many investors are turning to inflation-linked bonds amid concerns over rising prices.
- TIPS are offering high yields, but investors need to keep an eye on total returns.
- Commodities, infrastructure, and gold are among the other assets investors are turning to for inflation protection.
Inflation Remains a Concern Despite Lower Peaks
With the latest Consumer Price Index (CPI) data on the horizon, inflation remains a central focus for investors. While inflation has significantly decreased from its July 2022 peak of 9.1%, it still hovers above the Federal Reserve's target of 2%. Projections for the September CPI estimate a reading of 3.6%, partly influenced by rising energy costs amidst geopolitical tensions. The Fed's preferred inflation gauge, the Personal Consumption Expenditures (PCE) index, registered a core rate of 3% in August.
Concerns among Americans about inflation are also on the rise. The New York Fed's Survey of Consumer Expectations indicates that the one-year inflation outlook climbed to 3.9% in September, its highest point since May 2023.
TIPS: A Closer Look at Inflation-Protected Securities
Treasury Inflation-Protected Securities (TIPS) are designed to shield investors from rising prices. Their 'real' yields are currently at multi-decade highs, making them an attractive option. However, it's crucial to monitor total returns, as the iShares TIPS Bond ETF (TIP) has seen a year-to-date total return of -1.16%. This performance is largely due to rising interest rates, which negatively impact bond prices.
Despite this, the current yield on 10-year TIPS stands at approximately 2.87%, a level not seen since November 2008. This presents an interesting opportunity, according to Jason Draho, head of asset allocation Americas at UBS Global Wealth Management.
TIPS adjust their principal value based on inflation with a three-month lag, offering interest on an increasing principal. However, recent losses in TIPS total returns are attributed to rising real yields rather than inflation expectations. R.J. Gallo, chief investment officer of global fixed income at Federated Hermes, notes that income accruals have not been sufficient to offset price declines caused by rising real yields.
For investors concerned about duration risk, holding individual TIPS or creating a TIPS bond ladder with varying maturities can be beneficial. Short-term TIPS, such as those offered by Vanguard Short-Term Inflation-Protected Securities ETF (VTIP), iShares 0-5 Year TIPS Bond ETF (STIP), and PIMCO 1-5 Year US TIPS Index ETF (STPZ), provide more protection against rate increases.
Beyond TIPS: Diversifying with Stocks, Commodities, and Infrastructure
Rick Rieder, BlackRock's chief investment officer for global fixed income, advocates for a diversified strategy that includes equities, commodities, and alternative assets. Funds like the State Street Multi-Asset Real Return ETF (RLY), Fidelity Strategic Real Return Fund (FSRRX), and PIMCO Inflation Response Multi-Asset Fund (PZRMX) offer broad inflation protection.
The PIMCO fund, for instance, holds a mix of TIPS, commodities, gold, and real estate investment trusts (REITs), aiming for balanced returns. Commodities are particularly favored due to their price pass-through capabilities, allowing companies to shift costs to consumers. Gold and REITs also play a role in diversification.
Commodities, in general, have historically performed well during periods of high inflation. ETFs such as the Invesco Optimum Yield Diversified Commodity Strategy ETF (PDBC) and the iShares S&P GSCI Commodity-Indexed Trust (GSG) offer exposure to this asset class.
Infrastructure, encompassing assets like roads and ports, presents another inflation-hedging opportunity. Companies in this sector often have long-term contracts with inflation adjustment clauses. Investors can gain exposure through ETFs like the iShares Global Infrastructure ETF (IGF) and ProShares DJ Brookfield Global Infrastructure ETF (TOLZ).
While not signaling an immediate inflation crisis, experts advise adding inflation protection as a proactive measure against potential future price surges driven by supply-side shocks.
