IndexIQ, a pioneer in the hedge fund ETF industry, has expanded its product line to include two new ETFs designed to provide protection against inflation: the IQ CPI Inflation Hedged ETF (CPI) and IQ ARB Global Resources ETF (GRES). These ETFs hit the market at a time when investors are becoming increasingly concerned about the intermediate and long-term impact of massive stimulus plans implemented to combat the recent recession. Although deflation is a more immediate concern, worries about runaway inflation over the next 24 months have investors seeking out options to provide a real return and protect their assets.
Inflation-protected securities funds such as TIP and WIP have seen huge surges in popularity as investors look to establish inflation hedges. But these products have never been truly tested in a hyperinflationary environment. Moreover, according to IndexIQ (pdf), TIPS may have a higher correlation to bonds than inflation and higher levels of volatility than CPI in certain environments.
CPI is the first U.S. listed real return ETF, tracking a benchmark that seeks to provide a return above the rate of inflation as measured by CPI. The index is not limited to any one asset class, and may hold equities, fixed income securities, commodities, and currencies, all in varying amounts. As currently constructed, CPI is an “ETF of ETFs,” meaning that its holdings consist primarily of investments in other exchange-traded products. As of October 27, 2009, the components of the IQ CPI Inflation Hedged ETF were:
|IQ CPI Inflation Hedged ETF|
|SHV||iShares Barclays Short Treasury Bond Fund||54.1%|
|BIL||SPDB Barclays 1-3 Month T-Bill ETF||29.0%|
|TLT||iShares Barclays 20+ Year Treasury Bond Fund||8.1%|
|GLD||SPDR Gold Trust||7.3%|
|FXY||CurrencyShares Japanese Yen Trust||1.0%|
The index underlying CPI is a rules-based benchmark, and the fund will be rebalanced on a monthly basis. While CPI is tilted heavily towards Treasuries at present, this allocation could be altered significantly as economic statistics and trends change.
A New Way To Invest In Commodities
GRES takes a unique approach to gaining commodity exposure. Most commodity investments are dominated by exposure to oil and precious metals (especially gold). This ETF maintains holdings in eight natural resource sub-sectors: in addition to energy, livestock, precious metals, industrial metals, grains, GRES invests in the timber, water, and coal industries. Each of these industries is either overweighted or underweighted on a monthly basis based on valuation and momentum factors. This strategy assures diversified exposure to sectors that have historically performed well during periods of high inflation. As of October 26, the largest components of the index underlying GRES were Sandvik AB, a Swedish producer of mining and construction equipment and steel products, and Sumitomo Metal Mining Co., a global mining company.
There are a number of ETFs that utilize a similar strategy. Van Eck offers a line of ETFs that invest of companies that operate in commodity-related businesses, including gold (GDX), steel (SLX), coal (KOL), and a diversified hard assets fund (HAP). Unlike these products, however, GRES will hedge out equity exposure by taking short positions in the S&P 500 and the MSCI EAFE index.
Because the holdings of GRES are primarily equities, there is no concern of violating existing or future regulations handed down regarding the allowable interests in futures contracts on certain commodities. With further regulation being more a question of when, not if, many investors are understandably hesitant to establish large positions in funds that may be impacted by changing rules.
Disclosure: No positions at time of writing.