Don't let inflation bite — how to hedge with TIPS, commodities and infrastructure funds
TIPS are looking attractive but they aren't the only way to get inflation protection.
Key points
- Inflation remains above the Fed's 2% target, with September CPI expected at 3.6%.
- TIPS yields are at multi-decade highs, making them more attractive despite negative returns this year.
- Analysts suggest commodities and infrastructure as additional inflation hedges.
Investors are watching the latest Consumer Price Index reading on Wednesday as inflation remains a concern. The headline CPI is expected to reach 3.6% in September, still well above the Federal Reserve's 2% target, partly due to rising energy costs from the war with Iran. The Personal Consumption Expenditures index, the Fed's preferred gauge, showed a 3% core rate in August.
Inflation concerns among Americans are also rising. The New York Fed's Survey of Consumer Expectations showed the one-year inflation outlook in September climbed to 3.9%, its highest since May 2023. For investors seeking protection, options include Treasury Inflation-Protected Securities (TIPS), commodities, and infrastructure assets.
TIPS yields and performance
TIPS have not provided much inflation protection this year. The iShares TIPS Bond ETF has a total return of -1.16% year-to-date, as rising interest rates hurt bonds. The 10-year Treasury note recently hit multi-year highs around 5.3%, and bond prices and yields move inversely.
However, rising yields have made TIPS more attractive. The 10-year TIPS yield is currently at 2.87%, after closing at 2.951% on Oct. 5, levels not seen since November 2008. Jason Draho, head of asset allocation Americas at UBS Global Wealth Management, said, "Given where rates are, it's getting interesting."
The risk now is there will be supply side shocks that could push up inflation again.
— Jason Draho
Other inflation hedges
Beyond TIPS, analysts suggest commodities and infrastructure. Rick Rieder, BlackRock's chief investment officer for global fixed income, recommends a multi-pronged strategy including equities, commodities, and alternative assets. Broad inflation-protection funds include State Street Multi-Asset Real Return ETF and Fidelity Strategic Real Return Fund.
Draho recommends commodities based on long-term asset-allocation studies. He suggests owning a basket that's consistently rebalanced, as gold and oil perform well in different scenarios. For infrastructure, he points to operators of roads, ports, and bridges that collect long-term revenue under contracts with inflation riders. ETFs like iShares Global Infrastructure ETF and ProShares DJ Brookfield Global Infrastructure ETF offer exposure.
