As talk heats up about whether inflation is creeping into the U.S. economy, investors and advisors are on the hunt for exchange-traded funds (ETFs) that can act as a hedge against rising prices.
One market player who’s experiencing the effect of rising inflation worries is IndexIQ CEO Adam Patti. His IQ Real Return ETF (its clever ticker: CPI), launched in late 2009 to provide a real return of 2% to 3% above the U.S. consumer price index’s (CPI) rate of inflation, has recently seen an unprecedented increase in volume.
While the ETF may be relatively small—assets currently total just under $13 million—it has seen a significant rise in trading volume to 50,000 shares a day from 30,000, Patti said in an interview on Tuesday.
“People are afraid of inflation, and last year they weren’t,” Patti said. “This is an asset allocation product, and we don’t expect a lot of trading, so this is a nice pick-up for us. Inflation is clearly on the rise in energy and food prices, and we think the IQ Real Return ETF will be our breakout product this year.”
The rules-based, index-heavy IQ Real Return ETF’s core holding is in short-term Treasuries and 10 other asset classes rather than in more volatile government-issued Treasury Inflation Indexed Securities (TIPS), Patti (left) said. The ETF’s top holdings include CurrencyShares Japanese Yen Trust, Ishares Russell 2000 Index Fund, iShares MSCI Emerging Markets Index and PowerShares DB Gold, according to Morningstar’s profile of the ETF.
Inflation buzz was kept alive this week as data on both the consumer price index (CPI) and the producer price index (PPI) show the U.S. cost of living is on the rise. True, the nation’s inflation number currently stands at a low annual rate of 1.6%, but the prices of key goods that consumers buy daily are rising steadily. This rise, along with long-term fears of an out-of-control federal deficit, is stoking investor demand for inflation protection.
The U.S. Labor Department reported Thursday that the consumer price index for January increased by 0.4%, the same rate as in December. Core CPI, which excludes the more volatile prices of food and energy, gained 0.2%, just above economists’ expectations.
Higher energy prices pushed up the headline number, with some help from food and apparel, said the PNC economics team, led by Chief Economist Stuart Hoffman, in an analyst note. Gasoline prices continued to increase on a seasonally adjusted basis, up 3.5% for the month and now up 13.4% from a year ago. Food prices, they said, rose 0.5% in January.
“The good news for the Federal Reserve is that the threat of deflation is rapidly retreating, the bad news is that inflation is broadening from a just a commodity-specific phenomenon,” the PNC economists wrote.
Indeed, producer prices that eventually get passed on to the consumer also are rising. On Wednesday, the Labor Department reported that the core producer price index for finished goods rose 5% in January—it’s biggest jump in 27 months.
Many ETFs that can act as a hedge against inflation are normal ETFs that investors might hold anyway, said Michael Iachini (left), a director and ETF expert with Charles Schwab Investment Advisory, in an interview on Tuesday.
“I haven’t seen a pattern of product launches that are specifically tied to inflation-fighting ETFs,” Iachini noted. “They’re out there, certainly, and I think investors are worried about inflation, but I don’t think that has translated into a flood of products on the market to address that investor desire.”
ETF investors who are concerned about inflation can fight it four different ways, according to Iachini. Notably, his pick of products mirrors the sort of investment vehicles found in the IQ Real Return ETF’s core holdings.