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Is higher inflation waiting for the U.S., down the road? Very likely, considering the prolonged loose monetary policy and rapidly expanding debt load. So, does that mean you should liquidate your entire portfolio and call up some gold company offering physical gold at the dirt cheap price of 35% above the market? Not advisable. While gold is a great hedge against inflation, you should always consume with moderation. A less-risky option (and cheaper) would be to create your own real return portfolio, seeking to preserve your purchasing power by providing a return above the annual rate of inflation.

The first, and main, component in your real return portfolio should be inflation protected or inflation-indexed securities. These are fixed income investments structured to provide protection against inflation, by adjustments in the bond’s principal or interest paid to track changes in the official inflation measure- which in the U.S. is the Consumer Price Index, or CPI.

For this exercise, we will use three ETFs to meet this requirement: TIP, the iShares Barclays TIPS Bond fund, which covers the broad range of Treasury Inflation Protected Securities; LTPZ, the PIMCO 15 Year U.S. TIP Index fund, which provides exposure to longer duration bonds (increasing the sensitivity to rate changes); and WIP, the SPDR International Government Inflation Protected Bond fund, which diversifies the bond holdings away from just the U.S. The U.K., France, Canada and Japan account for over 45% of WIP’s holdings; Greece and Italy make up just 7%.

Of course, commodities are a direct reflection of, and hedge against, inflation. But, rather than dumping a sizeable portion of the portfolio into gold, we will capture the broad performance of commodities, using the PowerShares DB Commodity Index fund, DBC. This will help to eliminate any commodity-specific risk.

Along with the direct commodity exposure, we will add equity exposure through natural resource companies, which tend to benefit from higher prices. For this we will use IGE, which tracks the S&P North American Natural Resources Index. The bulk of this index is composed of energy companies, as you might guess. Since this adds equity risk to our portfolio, I prefer to stay on the North American continent, and avoid the international companies.

Next, we will add exposure to the real estate sector. Real Estate Investment Trusts, or REITs, are companies that purchase office, residential, retail, and other real property; REITs are required to distribute 90% of their taxable income to their investors. A simple and cheap way to capture the broad REIT market is the Vanguard REIT ETF, VNQ. This ETF tracks the MSCI US REIT Index.

As the final component to our real return portfolio, we will look to hedge our dollars using foreign currency. My choice for this, and the choice of many others, is the Swiss Franc- as it is traditionally a hard currency. FXF, the CurrencyShares Swiss Franc Trust, is a low-cost means to achieve this goal.

Below, I will provide current weights of my own real return portfolio, and also weights for a slightly more conservative, TIPS-centric portfolio.

Real Return Portfolio

iShares US Barclays TIPS

TIP

30%

PIMCO 15yr US TIPS

LTPZ

20%

SPDR DB Intl Govt TIPS

WIP

15%

Powershares DB Commodity

DBC

5%

S&P NA Natural Resource

IGE

10%

Vanguad REIT

VNQ

5%

iShares NAREIT 50 Fund

FTY

5%

Currencyshares Swiss Franc

FXF

10%

Real Return Portfolio (conservative)

iShares US Barclays TIPS

TIP

35%

PIMCO 15yr US TIPS

LTPZ

25%

SPDR DB Intl Govt TIPS

WIP

15%

Powershares DB Commodity

DBC

5%

S&P NA Natural Resource

IGE

5%

Vanguad REIT

VNQ

5%

Currencyshares Swiss Franc

FXF

10%

Source: Building a Real Return Portfolio With ETFs