Is inflation in the U.S. a good thing or a bad thing for retail investors? It depends; inflation can eat away at your purchasing power and your stock returns, or it can become an investment opportunity.
This article will introduce you to an interesting exchange traded fund (ETF) that can help you increase your protection against the problems of rising inflation while leveraging the opportunity to profit.
The U.S. Treasury sells notes of different yields, maturities and terms. One type of those notes available for purchase by retail and corporate investors are known as TIPS or Treasury Inflation Protection Securities.
A TIPS note yield is increased or decreased based on changes in the level of CPI or consumer price inflation. If the CPI or inflation is rising, the face value of a TIPS note increases and similarly the face value may fall if the CPI falls.
This means that TIPS are a hedge against inflation. As prices rise, the value of a TIPS note rises offsetting some of those losses due to inflation. You can buy TIPS from the Treasury through Treasury Direct, which is a fine alternative but there is a way to do this through the stock market as well through a TIPS ETF.
The ETF I am referring to in the chart below is the ^TIP^. As you can see in the chart below, it has outperformed the stock market during the last 12 months, which is not surprising considering the recessionary environment in the U.S.
From a fundamental and technical perspective it seems that one of the few things we can count on in this environment is higher levels of inflation in the long term. That may make the TIPS ETF an attractive mid-term value play after the correction of the past few months. From a portfolio management perspective this is a good way to add protection against inflation and to insert an element of fixed income to your diversification strategy.
Bottom line: Higher rates of inflation are either a problem or an opportunity. Which is really turns out to be is up to you as the investor.
iShares Lehman TIPS Bond Fund (TIP) – Daily Chart
John Jagerson is the author of many investing books and is a co-founder of LearningMarkets.com and ProfitingWithForex.com. His articles are regularly featured on online investing publications across the web.