Inflation Protection for Your Investments
August 22, 2008

SAN DIEGO (ETFguide.com) – Look around, we’re surrounded by inflation.

High gasoline prices have increased the cost of transporting food, clothing, and other goods. As a result, the price of these goods has shot up. If you’ve felt the pinch at the gas pump or at the grocery store, it’s inflation nipping at your wallet.

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The problem of inflation is global.

According to the International Monetary Fund, food and beverage prices have soared by 60 percent over the past three years in foreign markets.

Back here in the U.S., July data showed the Consumer Price Index (CPI) was up 5.6 percent year-over-year, mainly because of elevated food and energy costs. The figures exceeded forecasts and were higher compared to June.

What’s been the impact of inflation upon investors?

According to Matt Tucker, head of fixed income investment strategy with Barclay's Global Investor's iShares, “Inflation has led investors to seek out investments that provide inflation protection for their portfolio.”

Tucker adds, “The iShares Lehman TIPS fund (Ticker: TIP) has seen flows of over $2.4 billion year-to-date (YTD).” 

TIP is an index fund that invests only in Treasury Inflation Protected Securities (TIPS) issues by the U.S. Treasury. With U.S. TIPS you get coupon income plus inflation adjusted returns linked to the Consumer Price Index (CPI). Owning TIPS in an index fund setting avoids the task of dealing with individual securities.

So far TIP has gained 0.8 percent on the year and through the end of July had a 5.9 percent 12-month yield.

Another defensive solution is the SPDR DB International Government Inflation Protected Bond ETF (Ticker: WIP).

The fund follows a group of 120 inflation-indexed bonds from 18 developed and emerging countries. While domestic TIPS have two return components, WIP has three: coupon income, the inflation adjustment, plus the potential for gains from foreign currencies.

WIP has shed 4.9 percent and carries a 2.96 percent yield.

One last way to protect your investments against the corrosive effect of inflation is by eliminating expensive mutual funds or other high cost financial products that are eroding your returns.

Finding replacements for these expensive mutual funds is easier than ever.

Most funds have lower cost exchange-traded funds (ETFs) in corresponding asset categories. See ETFguide’s online database for help.