2 New Ways to Hedge Inflation with ETFs

Index IQ has introduced two new ETFs that are intended to provide a hedge against inflation.

The new ETFs offered by Index IQ are:

• IQ CPI Inflation Hedged ETF (NYSEArca: CPI)
  
• IQ ARB Global Resources ETF (NYSEArca: GRES)

As we enter a period of more inflationary pressures, investors will want to protect their assets against the odds. These two new funds offer a sophisticated approach to hedging the impact of a broad-based rise in price levels as measured by the CPI.

The IQ CPI Inflation Hedged Index, the index underlying the CPI, seeks to give investors a hedge against changes in the U.S. inflation rate by providing a “real return,” or a return above the rate of inflation as measured by changes in the Consumer Price Index.

Adam Patti, Index IQ’s CEO, tells Luisa Beltran for Ignites that the company wanted to have a portfolio of securities that make up different asset classes so that when inflation returns, there will be asset classes to capture it.

CPI is an ETF of ETFs and will have 54% allocated to the iShares Barclays Short Treasury Bond Fund (NYSEArca: SHV), 29% to SPDR Barclays Capital 1-3 Month T-Bill (NYSEArca: BIL), 8% in iShares Barclays 20+ Year Treasury Bond (NYSEArca: TLH), 7.3% in SPDR Gold Trust (NYSEArca: GLD) and 1% in the CurrencyShares Japanese Yen Trust (NYSEArca: FXY).

GRES is the first global resources hedged ETF. The fund seeks to solve the problems associated with the significant overweight in the energy sector inherent in other broad-based commodity products. GRES also provides a hedge against inflation and a real return through exposure to a diversified portfolio of commodity-related equities.

The fund invests in five traditional sectors: livestock; precious metals; grains, food and fiber; industrial metals; and energy. Also found in the index are coal, timber and water.

IndexIQ utilizes a proprietary rules-based methodology to construct the underlying CPI and GRES indexes. The expense ratio for both ETFs comes in at 0.75%.

Read the disclaimer, as Tom Lydon is a board member of Rydex Funds.

Comments

[Sovestor:]

New unproven ETFs keep popping up. Investors should always first analyze in detail, read the prospectus, wait and see the 3-months performance and correlation to the underlying indexes.

Oct 30 01:50 PM

[cato:]

Tom,
It greatly diminishes you that you announce this without even remarking on what a lame marketing gimmick and a fraud the CPI ETF is.

A portfolio that's almost 90% in nominal US treasuries is the precise opposite of a hedge against inflation. It's a perfect way to set yourself up to get destroyed by inflation. When inflation and nominal rates get up to 10%, how will those 20year treasuries be doing? This is irresponsible and you are irresponsible for failing to mention it.

Oct 30 05:06 PM

[Anthony Alfidi:]

CPI's asset allocation makes little sense for an inflation-fighting strategy. Majority allocation to short-term government bonds? Gimme a break; fixed income is the first thing to lose purchasing power when inflation ramps up. GRES makes a lot more sense with its heavy commodity focus.

Oct 31 11:40 AM

[Analyste de...:]

I like Tom's articles but wonder if this is a (paid?) puff piece

GRES is the first global resources hedged ETF : how is it "hedged" exactly? It sounds like a F-o-F commodity producers index. Fine, but I don't even see that GRES includes commodities, which might theoretically hedge the equity portion.

This article raises more alot more questions than it answers, unfortunately.
Grade: F

Oct 31 05:05 PM

[Adam Patti:]

Happy to address any of your questions. Our rule books are on the website so you can see precisely how the CPI portfolio reallocates to different asset classes based on changes in the rate of inflation. Additionally you can review how we use short exposure to the equity markets on GRES to reduce correlation to the equity markets and reduce volatility. If you have further questions, my telephone number is right on the website... i'd be happy to discuss at length.

These products have been years in development, and if you spend the time to understand how they are constructed i'm quite sure you will see their benefits.

Thank you.

Nov 06 06:27 PM