A new way to protect against inflation? Who cares..?

By: ispeculatornew
Date posted: 10.30.2009 (5:00 am) | Write a Comment  (6 Comments)

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inflation2On this blog, as well as on many others, inflation has became an important topic of discussions fears of inflation become more mainstream, especially because of the massive expansion of monetary supplies that were injected by the Fed in the past year. Ironically of course, many argue that the biggest fear is deflation. Today was a good inflation reminder as Norway became the first European country to raise interest rates in an effort to fight inflation. The problem of course is that many think the US will not be able to do such a move because its economy is too fragile. This would create an inflation friendly environment.

inflationIn any case, it is no surprise to see that a new ETF has just been launched whose mission to provide a solid “real return”, 2-3% above inflation. Of course, while inflation sits at current levels, the expected return does sound very low. But in a scenario where inflation could rise to 10% or more, such an ETF would provide solid protection.

The new ETF’s ticker is CPI, a convenient name given the fact that the CPI (Consumer Price Index) is the most known statistic that indicates inflation. It measures the cost of life. It does so by holding a variety of assets such as short term bonds, commodities and some currencies.

inflation-70sThe idea can be good of course. But as I had said when I was discussing “Target Date Funds“, I don’t think it’s usually a good idea to buy “ETF’s of ETF’s“, because you do end up paying for an additional layer of fees while you could easily do it yourself. While I have never personally lived through a period of massive inflation, I doubt it is suitable for most investors to start allocating important portions of their portfolio to protect against inflation. It is not an overnight phenomenon and I would think that if it does become a problem, we will have time to reallocate our portfolios in consequence.

So no, I will not be buying any CPI, at least not as a long term investment. And given all of the fees involved, probably not as a short term investment either. It does have .48% of fees, but you must add to that the fees included in the underlying ETF’s, which could end up costing you close to 1% as constituents change… If you want to pay 1% of fees annually, buy a mutual fund:)

On a more serious note, having different type of assets (equities, commodities, and bonds) is a good idea to generate more solid inflation protection. While gold for example has generally been a good inflation hedge, it has not always been the case so the idea behind this ETF isn’t bad. But that is not enough to make me a buyer of CPI.

Do you plan on trying out this ETF? Don’t get me wrong, I love ETF’s, but I certainly do not think all ETF’s are good ideas, especially when considering each investor. I would much prefer slowly tilting my portfolio to become more “inflation resistant”

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  1. Comment by Zavi — October 30, 2009 @ 8:30 am

    yeah, proud to be canadian- beer commercial 🙂 I’m a pro of XSP. XSP is currency hedged and XSP’s MER is only .15%. Made a great deal by buying it in March.

  2. Comment by Zavi — October 30, 2009 @ 12:35 pm

    but for the CPI, not too sure I would invest in it. I am not too sure that it’s going to be hot. Why not invest in real return bond instead (inflation+interest) without the fees?

    for the moment the weightings are
    iShares Barclays Short Treasury Bond Fund SHV 54.09%
    SPDR Barclays Capital 1-3 Month T-Bill ETF BIL 28.96%

  3. Comment by IS — November 1, 2009 @ 7:55 pm

    yeah, good deal Zavi, how did you end up buying it in March? That was great timing:)

    and yes, indeed.. I think it would be easy to replicate by buying those two ETF’s 🙂

  4. Comment by Zavi — November 2, 2009 @ 2:57 pm

    Not too bad, trade price 9.41

  5. Pingback by Festival of Stocks #166 | ModernGraham.com — November 9, 2009 @ 9:58 am

    […] Intelligent Speculator presents A new way to protect against inflation? Who cares? […]

  6. Comment by Money Management — December 30, 2010 @ 11:47 pm

    Inflation is ok if it is meant exclusively for economic recovery. The citizens does not have to bear the brunt of rising prices in the name of recovery.

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