With the government sitting on what seems like gazillions of dollars in debt, concerns about a looming inflation crisis are swirling about in many an investor’s mind. That’s where Treasury Inflation-Protected Securities (TIPS) exchange traded fund come in handy as a bet against potential rising inflation.
Unprecedented government spending, interest rates near zero, and the potential for stagflation – slow growth coupled with high inflation – are just some of the reasons Alexander Green for Investment U recommends TIPS.
However, market observers either believe that deflation is more likely than inflation or that inflation is likely, but loath to buy any kind of government security.
Green doesn’t necessarily rule out deflation all together, but he suggests hedging one’s bet by diversifying into other asset classes. Investors may use gold and silver, but they are a less than perfect hedge, remarks Green.
TIPS are less volatile than traditional bonds and a good diversifier, additional benefits include:
- Interest. TIPS pay interest every six months like any other regular Treasury bond. But TIPs get the added benefit of a higher principal each year by the amount of inflation as measured by the consumer price index (CPI). Semi-annual interest payments also increase alongside inflation.
- Tax perks. The interest is exempt from state and local income taxes, but not federal tax.
- iShares Barclays TIPs Bond ETF (NYSEARCA:TIP)
- SPDR Barclays Capital TIPS (NYSEARCA:IPE)
- PIMCO 1-5 Year U.S. TIPS (NYSEARCA:STPZ)
Max Chen contributed to this article.