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From: "Money and Markets" <eletter@e.moneyandmarkets.com>
Date: 24 February, 2011 4:33:01 AM PST
To: <computerdiy@yahoo.com>
Subject: 4 Ways to Fight Inflation with ETFs
Reply-To: support@e.moneyandmarkets.com
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MONEY AND MARKETS » Thursday, February 24, 2011 YOUR BEST SOURCE FOR THE UNBIASED MARKET COMMENTARY YOU WON'T GET FROM WALL STREET
[«] Money and Markets Archive View This Issue On Our Website [»] 4 Ways to Fight Inflation with ETFs by Ron Rowland
Dear Subscriber,
Inflation is creeping up everywhere. Prices for gold, silver, oil, gasoline, food, even soft drinks are all creeping higher. You see it every day.
The one area where we aren't seeing inflation is wages. With the U.S. unemployment rate at 9 percent (and much higher in some areas), few workers are seeing much growth in their paychecks.
Unhappy people demand change. This is a dangerous blend. When the cost of living goes up and income doesn't follow, people get squeezed. And unhappy people soon become restless and demand change. Just ask former Egyptian president Hosni Mubarak.
I'm not predicting riots or revolution here in the U.S. I am concerned, however, that our leaders in Washington don't realize the danger they are creating with their free-spending, money-creating policies. They are walking a tightrope without a net.
So if inflation gets out of hand, how can you make the best of it?
ETFs are my top choice! You can quickly and easily build a well-balanced portfolio that protects you from the ravages of inflation — and could even let you profit.
Here are four groups of inflation-fighting ETFs you might consider ...
ETF Inflation Fighter #1:
TIPSGovernment bonds are usually one of the worst things you can own in an inflationary economy. But what if you could buy bonds whose principal automatically adjusts to keep up with inflation? Now you can — and you can do it through ETFs.
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Treasury Inflation-Protected Securities, often called TIPS, are issued by the U.S. Treasury as well as some other national governments. The concept is simple: If an inflation benchmark like the Consumer Price Index goes up too fast, the bond's value is given an extra boost. This keeps bond holders from losing their purchasing power.
Buying individual TIPS bonds is possible but impractical for small investors. ETFs are the better way for most people. Here are a few you may want to look at, based on your particular needs:
- SPDR Barclays TIPS ETF (IPE)
- iShares Barclays TIPS Fund (TIP)
- PIMCO Broad U.S. TIPS Index Fund (TIPZ)
- Schwab U.S. TIPS (SCHP)
- iShares Barclays 0-5 Year TIPS Bond Fund (STIP)
- PIMCO 1-5 Year TIPS Index Fund (STPZ)
- PIMCO 15+ Year U.S. TIPS Index Fund (LTPZ)
- SPDR DB International Government Inflation Protected Bond (WIP)
Incidentally, if you have a brokerage account at Fidelity you can buy and sell TIP without a transaction fee. Schwab customers can do the same for SCHP.
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ETF Inflation Fighter #2:
Real Return FundsA "real return" ETF is designed to give you just that: A "real" return when inflation rears its ugly head, and hopefully without making you take too wild a ride along the way. In investment-speak "real" means "inflation-adjusted."
IQ Real Return ETF (CPI) tries to do this by allocating assets between various investment categories, which can include stocks, Treasury instruments, foreign currencies, and gold. Its goal is to outperform the U.S. inflation rate, as measured by the Consumer Price Index.
CPI is a fairly new ETF, and it's not clear yet whether it will be able to achieve its objective. Nonetheless, I'm glad it is available and hope sponsors will offer more such funds.
Farmers are bound to profit from higher food prices. ETF Inflation Fighter #3:
Food and AgricultureBeen to the grocery store lately? Then you know food prices are high and getting higher. This is bad news for consumers, but good news for farmers, fertilizer makers, farm land owners, and quite a few other people.
ETFs give you a way to get aboard this trend and make back some of what you're losing at the supermarket. See my column Profit from Rising Food Prices to learn more.
ETF Inflation Fighter #4:
GoldI've talked about gold ETFs often in my Money and Markets columns. Rather than repeat myself again, I suggest you revisit Go for the Gold with Mining ETFs and Gold Isn't All That Glitters in ETF Land.
Some Inflation
Fighters to Avoid
Real estate might no longer be an inflation haven. Two other ETF groups may also benefit from inflation. But I'm concerned about some additional factors that could affect them. Real estate, for example, has historically been a great inflation hedge — and the more leveraged the better. However, since it was a housing bubble that got us into the current mess, I'm not sure we can count on real estate ETFs for help this time.
The second group is foreign currency ETFs of countries with lower inflation than the U.S. These ETFs should theoretically benefit if inflation makes the dollar decline. But as my colleague Bryan Rich just pointed out last week, the dollar may still be the "least ugly" world currency for some time to come.
As you can see there are plenty of ways to protect your assets from inflation. Look into them and be ready to act!
Best wishes,
Ron
Ron Rowland is widely regarded as a leading ETF and mutual fund advisor. You may have read about Mr. Rowland and his strategies in publications such as The Wall Street Journal, The New York Times, Investor's Business Daily, Forbes.com, Barron's, Hulbert Financial Digest and many more. As a former mutual fund manager from 2000 to 2002, Ron was a pioneer in using ETFs inside of mutual funds. Today, he is the editor of International ETF Trader, dedicated to helping investors use ETFs to profit from ever-changing global market conditions.
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