3 Off-The-Shelf Inflation-Fighter ETFs

February 07, 2013

A number of inflation-fighting ETFs are available to investors, but how do they work?


Central banks around the world continue to print money with no end in sight. For many investors, the inflation question is not “if,” but “when.” Can real-return ETFs help?

ETFs provide a truly massive range of inflation-fighting tools, including TIPS, REITs and commodities. But not everyone has the time or inclination to put these powerful building blocks into a strategy that works for them.

That’s where a trio of off-the-shelf inflation-fighting ETFs comes in. They are the IQ Real Return ETF (NYSEArca: CPI), the WisdomTree Global Real Return ETF (NYSEArca: RRF) and the SPDR SSgA Multi-Asset Real Return ETF (NYSEArca: RLY).

These products are expressly designed to provide one-stop shopping for investors looking to preserve capital while earning so-called real returns—returns over the rate of inflation.

By the way, I’m not discussing the PowerShares DB US Inflation ETN (NYSEArca: INFL) or the ProShares 30 Year TIPS/TSY Spread ETF (NYSEArca: RINF), as these securities are designed to rise and fall with the market’s expectation of inflation rather than to provide real returns.

So how do the real-return ETFs work and what do they hold? And are they ownable and tradable?

I’ll take a quick look at the three funds—CPI, RRF and RLY—with these questions in mind.

IndexIQ’s CPI

Launched in October 2009, Index IQ’s CPI is the oldest and most conservative of the bunch. Two-thirds of the fund is deployed in Treasury bills, which helps to preserve capital but doesn’t do much for returns above inflation. For that, CPI depends on roughly 10 percent stakes in U.S. equities, gold and long-dated Treasurys. It avoids commodities other than gold, and its positions in REITs are minimal.

The chart below paints CPI as the “steady Eddie” of the bunch, meaning it has provided extremely low volatility and small positive returns.

CPI has an annual fee of 71 basis points, $50 million in assets and trades at spreads of 19 basis points. That makes it ownable and tradable in my view, but I acknowledge that a 71 bp fee—$71 for each $10,000 invested—is a real drag on a low-risk, low-return strategy and that some investors require a larger and more liquid ETF.

WisdomTree’s RRF

WisdomTree’s RRF offers a different take on the space. The “Global” in the fund’s name isn’t for show: Inflation-linked bonds from around the globe dominate the fund’s 70 percent fixed-income allocation. These bonds come with higher yield than U.S. TIPS, but carry exchange rate risk too.

RRF goes whole-hog into commodities too—its 30 percent stake is well diversified across energy, precious and industrial metals, softs and livestock.

However, investors have given RRF the cold shoulder since its July 2011 launch.

The fund goes for days a time without trading a single share, and assets under management are tiny—$5 million. For me, this takes it out of consideration.

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