Vanneman: An Inflation-Protection Primer

June 12, 2014

How should investors spell inflation protection? C-O-M-M-O-D-I-T-I-E-S.

This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today's article is co-authored by Rusty Vanneman, chief investment officer of Omaha, Neb.-based CLS Investments and Michael Ashton, managing principal, Enduring Investments.

The Consumer Price Index (CPI) rose in the most recent release to 2 percent on a year-over-year basis, and is near its highest level since early 2012.

More worrisome, the Cleveland Fed’s Median CPI, which measures the price change of the “median” category every month, jumped 0.3 percent in April—the largest move since 2008—and is at 2.2 percent on a year-over-year basis.

Nearly 70 percent of the categories in the CPI saw the annual rate of inflation increase from March to April, which represents a breadth of inflation acceleration about as bad as we have seen in at least 15 years.

In this context, it’s no surprise that some investors are growing increasingly concerned about the possibility that the extraordinarily loose monetary policy of the last six years could lead to greater inflation ahead.

So, how should investors scouring the ETF landscape where quite an array of options are available prepare?

We believe a broadly diversified portfolio of commodities may well be the best choice at this time, though inflation is complex and so too is inflation protection. That means that the appropriate choice today may not be the appropriate choice tomorrow.

With these complexities in mind, let’s survey what’s available right now.

Two Inflation-Protection Options

There are many asset classes that offer some sort of inflation protection.

After all, any asset class that doesn’t keep up with inflation in the long run is doomed to eventually fade to insignificance in the capital markets compared with those asset classes that, at least, keep pace with the price level.

However, many of these asset classes are difficult to access in a liquid form—think collectibles or farmland. Moreover, the sort of investment that represents solid protection when yields are high and already incorporate some expectations for higher inflation may not offer the same level of protection when yields are low. The same goes for other facets of the ever-changing market environment.

For the clearest example, take Treasury inflation-protected securities, otherwise known at TIPS.

Our favorite TIPS ETFs include:


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