Looking for an Inflation Linked Parking Spot

With inflation whipping us at every turn and stocks looking like incredibly dangerous investments, traders and investors are looking for an inflation combating place to park some money.

A lot of people have been using gold, but the heights that gold has reached and its extreme volatility leaves one looking for the cliff. This opportunity has not been lost on fund managers, and there exists an incredibly convoluted set of funds where you could place your money that call themselves ‘inflation linked’. Most of us don’t want to become 'Inflation Linked Fund Gurus' (ILFGs) - we just want a safe place to park our money until the storm passes. I did a Yahoo query for all symbol decodes with inflation in their names, and got back 200+ returns; and yes, there were 200 funds claiming to be inflation linked. Geez. If you Google "+inflation +fund" you will get back 13 million returns.

Struggling through the Yahoo list, the Google list (just the first hundred or so) and information from ETF-Connect, I came up with 3 categories: ETFs, mutual funds and closed-end funds.

The ETFs are the easiest:

iShares Lehman TIPS Bond ETF (TIP) is a Lehman iShares Fund that, more closely than anything else I found, follows US Treasury TIPS. It tracks the Lehman US TIP index. There are no international bonds, no corporate bonds, no futures, swaps or hedges. Just TIPS.

SPDR Barclays Capital TIPS ETF (IPE) is a SPDR fund that tracks the Barclays US Government inflation linked Bond Index. Also just TIPS.

It’s interesting that during the past year, as bond prices varied on volatility in the stock market and on expectations of future inflation and future interest rates, IPE outperformed TIP.

Then there are a LOT of mutual funds. Most are underperforming the ETFs, some disastrously so. The following table shows just a few that I found interesting:

Most people I talked to equated ‘a TIPS fund’ with VIPSX, and VIPSX seems to appear most frequently as a recommendation for a TIPS fund in various articles. VIPSX is as nearly identical to TIP (the ETF) as you can get. Its price tracks the price of TIP almost exactly as does its yield and its expense ratio is the same. I believe TIP and VIPSX are interchangeable. All of the other funds had considerably higher expense ratios. For example, PIPJX has an expense ratio five times that of TIP and VIPSX . PIPJX is a very managed fund. It hedges against foreign currency fluctuations; it is 80% US and 20% foreign; and ot invests up to 15% in ‘high yield securities’ (junk bonds). PIPJX does NOT correlate with TIP and almost looks like a short TIP.

Wasted management fees, as per usual.

There are also closed-end funds that are interesting.

Western Asset/Claymore Inflation-Linked Securities & Income Fund (WIA) and Western Asset/Claymore Inflation- Linked Opportunities & Income Fund (WIW) are related Western Asset/Claymore closed-end funds, and while they are using the inflation-linked designation, they are really diversified funds. What exactly they have in their portfolio is not easy to determine. They have tracked TIP pretty closely over the past two years and have yields which are higher than TIP.

Western Asset Inflation Management Fund Inc. (IMF) is a Legg Mason closed-end fund that is co-managed by Western Asset. It invests the ‘majority’ of its assets in inflation protected securities. It is global in scope. The yield on IMF is less than the ETFs and the price has followed but slightly underperformed the ETFs over the past two years.

One cannot look into TIPS and related instruments without encountering the short funds. The ultrshort proshares (UltraShort Lehman 20+ Treasury ProShares (TBT) and UltraShort Lehman 7-10 Yr Treasury ProShares (PST)) are meant to provide -2x the performance of 20+ year treasuries and 7-10 year treasuries respectively. Do these inverse-track the TIPS also?

These ultashorts are new, and it’s too soon to tell, but they are going in the right direction. The opinions about future interest rates, future inflation rates and future equity levels and the effect these will have on bond values seems to switch around twice a week. Some believe that treasuries, inflation indexed or not, are headed for the dumpster. These funds are for that audience.

So where should you park your money? If you want TIPS than TIP or IPE both look good. They are pure US TIPS, have ultra-low management fees, can be traded at any time the market is open. VIPSX and TIP are interchangeable. I am very interested in WIW. WIW is outperforming the ETFs and seems as ‘inflation-indexed’ as the ETFs . Its management fees are not too horrendous. It trades at a discount to NAV while the ETFs trade at a slight premium. The conventional wisdom is that discounts are to be preferred. I will probably split between WIW and TIP.

Disclosure: I have positions that include  VIPSX, TLT, TBT, and PST.

Comments

[theinvestingspeculator]

I think a better investment is shorting the 30-year bond. Debt instruments have not priced in coming inflation.

[DougM]

How much of those yield figures on TIP and IPE (and the mutual funds) are due to the non-repeatable rise in bond prices associated with falling interest rates? These investments look far from safe to me; won't they give back those gains as interest rates rise?

[drbagel]

I would argue that bonds are the wrong way to hedge inflation. TIPS are indexed to CPI, which underestimates inflation for several reasons, not the least of which is the exclusion of food and energy. In general I think they are misunderstood. All they really promise is stable value. When inflation is up they underestimate it and when inflation is down they pay almost nothing. TIPS are really most useful for people heavily invested in bonds. For folks with generous stock allocations, I think an allocation to an inflation liked sector goes much further than TIPS possibly can. Inflation creates false shortages. Commodity prices go up if there is excess demand relative to supply, but also if there is too much money. The result is a false boom for commodity producers which is rapidly reflected in stock prices. XME seems to make the most sense (metals and coal). Some people may prefer commodity ETF's or ETN's but these carry tax consequences or corporate debt risk.

[Foust]

What about PARRX?

[E.D.Hart]

The investing speculator is correct: shorting treasuries--if you know what you are doing may be a better bet as there is a massive bubble in treasuries now. They are currently guaranteeing that you will lose money, after inflation, as they carry a negative yield.

You are in effect, paying the government for the right to loan it money.

DrBagel is also correct, the TIPS are not a good vehicle for long term inflation protection because they are linked to flawed US government inflation calculations. If you trust the government to calculate inflation for you, then go for it.

But real inflation is north of 8%. Thus tips will leave you in the hole.

One option that still looks good now is the energy trusts that are linked to oil and natural gas. Three of my favorites are PWE, COSWF, and HGT. The payouts are currently between 10-13%.

True, the new Canadian tax regime will take a bigger bite, but this is more than made up for by the increasing dividends in appreciating currency of the Canadian dollar (except for HGT, which is in US).

Disclosure: I own COSWF and PWE.

[Aalan]

You forgot WIP, which invests only in non-US inflation-protected securities. Other governments are more honest about inflation rates than ours, and the interest is higher to begin with, so it's a much better bet, IMO.

[User 86999]

vipsx was @ 13.15 on 3/10, and then it dropped to a level @ 12.56 on 6/13. That's a drop of 4.5%. The quarterly dividend comes out to a little more than 5% (without deceptive financial compounding jugglery), . Now subtract the 0.2 expense ratio, and we're left with far less than a decent bank savings account will pay. The point being that bonds are not as safe for parking as they are thought to be.

All the CPI underestimates, and inflation being more than the yield and stuff are irrelevant in the context of this article which seeks to simply park the money, meaning preserve it safely enough with possibly let it grow a little with minimized risk.

[E.D.Hart]

Growing your money after subtracting inflation means a net shrinking of your money, hence guaranteed risk. There is no minimized risk--its built in to lose you money.

[oldman]

HGT, down $7 in just 4 trading sessions. You cannot compare to bonds.

[Joe Eifrid]

Bill Gates parking some last week in WIA

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