S&P Dow Jones Indices has launched a new index that that has the potential to hedge against the rising cost of college tuition once new investment vehicles based on the index come to market.

(Related: Colleges Feeling the Pressure of High Tuition)

The S&P Target Tuition Inflation Index is designed to be a better long-term hedge against the rising cost of college than a typical 60/40 stock/bond portfolio, says Jodie Gunzberg, a managing director, product management, at S&P Dow Jones Indexes.

(Related: How American Families Pay for College: 2017 )

“College tuition has risen a lot faster than CPI, which is challenging for people saving for college,” says Jodie Gunzberg, a managing director, product management at S&P Dow Jones Indices, referring to the consumer price index, the primary indicator of rising inflation.

Between the 2011-’12 and 2016-’17 school years, published tuition and fees rose 9% at public four-year colleges (for in-state residents) and 13% at private nonprofit four-year institutions after adjusting for inflation, according to the College Board.

(Related: How American Families Pay for College: 2017 )

Average net prices rose even more. Net tuition and fees over the same five years rose 21% at public four-year colleges and 12% at private four-year institutions.

The S&P Target Tuition Inflation Index attempts to protect against rising prices for college by combining several component indexes: the S&P U.S. Treasury TIPS 1-10 Year Index and S&P U.S. Treasury TIPS 15+ Year Index, which are designed to move with CPI inflation; the S&P 500 Bond Index (for investment-grade bonds); and the S&P 500.

The TIPS components are fixed, each comprising 40% of the index; the stock and bond components and potential 3-month Treasury bill allocation are variable, depending on market conditions.

“We thought through what really drives tuition and the ways colleges pay for expenses … from tuition and endowments and, for public universities, from government appropriations,” says Gunzberg. 

The researchers at S&P Dow Jones Indices found that tuition inflation was higher when the stock market performed poorly because then endowments have less money to spend on tuition. In those circumstances, the index would short the S&P 500 index, taking on a maximum 10% short position and holding a maximum 30% position in corporate bonds or a mixture that’s top-heavy in corporate bonds and up to 5% in Treasury bills.

It’s “far superior” to the traditional 60/40 stock bond mix as a hedge against tuition inflation over the long term, says Gunzberg.

Her back-testing shows the index beating tuition inflation 100% of the time over a period of eight years or more but only 60% of the time over four years.

Gunzberg says she’s had inquiries about the index from investment product providers and potential products could come in a variety of wrappers, but none is on the market yet.

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