Looking for an Inflation Linked Parking Spot

by: Daniel Shirley

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 (NYSEARCA: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 (NYSEARCA: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 (NYSE:WIA) and Western Asset/Claymore Inflation- Linked Opportunities & Income Fund (NYSE: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. (NYSE: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 (NYSEARCA:TBT) and UltraShort Lehman 7-10 Yr Treasury ProShares (NYSEARCA: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.