Published:
May 19, 2008
It's one of the most fundamental laws of investing: when times
get tough, investors get cautious.
The market is driven by fear and greed, and when the pendulum
shifts towards fear, many begin repositioning their portfolios
in favor of conservative, investment-grade bonds. Keep in mind,
though, that fixed-income vehicles come with their own inherent
risks -- like inflation, which over time can erode the value of
a bond's principal and interest payments.
And it's often at times like this (when equity investors are
bailing out and central banks around the world are slashing
interest rates to stimulate economic growth) that inflationary
pressures begin creeping higher.
Here in the U.S., the Fed is keeping a close eye on the
situation, as the telling Consumer Price Index (CPI) has ticked
up over the past year. Meanwhile,
inflation is running at an uncomfortably fast pace throughout
Europe, and rates in China have reached levels unseen for over a
decade, prompting the government to freeze prices for everything
from gas and electricity to basic healthcare.
Fortunately, there is a way to not just sidestep inflation, but
actually profit from it -- Treasury Inflation-Protected
Securities, or TIPS. These government-issued bonds are closely
tied to the CPI, and their principal adjusts accordingly,
ratcheting higher with every up tick in inflation. And because
the interest rate is applied to the adjusted principal, the
semi-annual interest payments can rise as well.
Fund investors have several options when it comes to
TIPS-based ETFs, but
SPDR DB International Government Inflation-Protected Bond
(AMEX: WIP, $61.15)
, launched last month, is the first to
offer global exposure to inflation-wary investors.
For a modest expense ratio of 0.50%, shareholders can track an
index of inflation-adjusted debt issued by sovereign governments
of both developed and emerging markets. Overall, the index
contains more than 120 holdings representing 18 different nations
and denominated in a broad basket of foreign currencies. Roughly
60% of the fund is devoted to bonds with top-notch "AAA" credit
ratings, and the maturity breakdown suggests that duration will
be in the intermediate range.
Of course, there's no such thing as a free lunch; in exchange
for inflation adjustments, investors must generally be willing
to accept lower yields. On a total return basis, though, the
fund has outstanding potential. Backtested data as of February
29th shows a total return for the underlying index of around
+21% over the prior year -- gaining 12% from a
weak dollar, 5% from inflation adjustments, and the rest from
coupon payments and capital appreciation.
While I think the dollar should remain weak over the long-term,
any rallies will drag on the fund's returns.
Nevertheless, betting on continued inflation in red-hot
commodity-driven emerging markets seems like a wise move.
Nathan Slaughter
Editor
The ETF Authority
About
The ETF Authority
The mission of The ETF Authority
is to help our readers identify today's most profitable ETFs and closed-end
funds. (Learn
More)
About Nathan Slaughter
Nathan Slaughter has developed a long and successful track
record over the years by investing in both exchange-traded funds (ETFs) and
deeply discounted value securities. When it comes to ETFs, Nathan has
created a proprietary ranking system that helps him zero in on today's most
promising funds.
Nathan's previous experience includes a long tenure at
AXA/Equitable Advisors, where he provided comprehensive investment advisory
services to small businesses and high net-worth clients. He also honed his
research skills at Morgan Keegan, where he performed asset allocation,
retirement planning, and consultative portfolio management services.
Several years ago Nathan switched gears and decided to devote
his time exclusively to financial analysis and writing. He has since published
hundreds of articles for a variety of prominent online and print publications,
and he now writes exclusively for StreetAuthority.com.
Nathan's educational background includes NASD series 6, 7, 63,
& 65 certifications, as well as a degree in Finance/Investment Management.
He currently resides in Shreveport, LA with wife Julie and sons Aidan and Riley.
To learn more about Nathan Slaughter's premium investing newsletter -- The
ETF Authority -- please
visit
this link.
|
