The Treasury as well as other central banks continue to pump liquidity into the markets. Gold prices have zoomed upward over the past few years. This commodity is primarily viewed as an inflation hedge. Given the huge rally in gold, this has forced investors to search for other inflation-hedged investments. Are there any other alternatives to inflation protection? Besides gold, it is possible to buy the U.S. inflation-protected securities as well as international inflationary protected securities. The U.S. TIPs are accessible individually or through an ETF, while the international inflation securities are best accessed through an ETF.
International Inflation-Linked Bond Fund (ITIP).
This inflation indexed security fund is not invested in any non-investment grade countries. Yet it does have a basket of 15% non-rated securities in countries such as Brazil, Chile and Italy. The biggest exposures are to Brazil which has a Baa2 and the United Kingdom for the time being still has its Aaa rating. While the United Kingdom has had relatively stable inflation rates, Brazil has had to deal with several periods of hyperinflation. Now that the central bank of Brazil is independent, inflation is likely to be more stable. Brazil's inflation target is 2.5% to 6.5%. However, it is likely to finish 2011 slightly above this target. This could bode well for investment returns. The United Kingdom has an inflation target of 2%. It views anything above or even below this target as bad policy. ITIP was only recently established. It has a medium-term maturity of 11 years. It is important to note that the fund has an expense ratio of 0.40%, which is on the low side for an ETF.
SPDR DB International Government Inflation-Protected Bond ETF (WIP)
This fund also does not invest in the U.S. TIPs market. The fund targets international investments. It is less concentrated. This fund also has a large position in the United Kingdom. However, the weighting on Brazil is much lower at 4.5% versus over 14%. The top holdings are in more stable countries with inflation, which have been managed relatively well over the past several years. The index credit rating quality also is better than ITIP with only 3.90% of the fund being below investment grade.
US TIPS Market Exposure
Investors seeking to gain protection from U.S.-based inflation have many opportunities to do this. This can be done outright by entering the bond market. Or investors can invest in one of PIMCO's inflation protected funds such as: Broad US TIPS Index ETF (TIPZ), 15+ Year US TIPS Index ETF (LTPZ) and the short term fund, 1-5 Year US TIPS ETF (STPZ). These products are passively managed but give the investor a diversified number of underlying securities. There are other Treasury inflation protected ETFs such as IPE and TIP.