Inflation and Currency Protection in Your Portfolio

June 5, 2009 by  
Filed under Investing

This just a quick investment tip for you to consider over the weekend. It foreign_currencyaddresses two problems that will confront your money and your portfolio in the coming months:  inflation and devaluation of the dollar.

These problems are real and they could become acute in a hurry. Apart from gold (which I do not like), a standard investment strategy for inflation protection is to buy inflation protected securities from the U.S. Treasury. These are sometimes called “real return bonds” because they promise a rate of return over the inflation rate. In the U.S., these can be TIPS, I-Bonds, or a TIPS fund, such as the Vanguard Inflation Protected Securities Fund (VIPSX).

But this asset class does not protect you from a decline in the dollar. Can you buy something that does both?

Yes you can – the  SPDR DB International Government Inflation-Protected Bond ETF (WIP). This exchange traded fund is based on a collection of inflation-indexed bonds issued by foreign governments, including the U.K., France,  Sweden, and Brazil. It yields 2.3% with an expense ratio of 0.5%.

Although the WIP fund is down 15% over the past year, it is on the upswing, showing a 6.2% gain YTD.  Now could be a great time to get it.

Because it gives you protection against both inflation and currency devaluation, this ETF is something to consider for your overall asset allocation strategy. At the very least, it saves you the trouble and expense of owning both a TIPS fund and a non-hedged foreign currency/bond fund.  The major downside compared to owning TIPS, for example, is that you do not have principal protection.

I like the concept myself. What do you think?

Photo credit: Bradipo

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6 Responses to “Inflation and Currency Protection in Your Portfolio”
  1. TFB says:

    WIP is tied to inflation in those other countries. If the U.S. experiences high inflation but those other countries don’t, then you are not protected against the high inflation in the U.S. You still have the currency effect though.

  2. kitty says:

    An interesting idea and something I’ll certainly consider.

    A number of US companies benefit from low dollar as well.

    One thing I am wondering about though. With all the money being printed inflation seems almost like a no-brainer. But the money supply isn’t a sufficient requirement for inflation. There is also velocity of money which is still very low. There is a huge unemployment, the rate of job losses may have slowed down, but a lot of people are still unemployed. Wages aren’t likely to go up any time soon. There are still coming losses in commercial real estate, residential loans coming for rate reset and losses in credit card businesses. Then there is de-leveraging of both companies and households. People aren’t rushing to spend now so there isn’t such a push to raise prices. These are all deflationary factors.

    Sure, the price of oil is up, but it could be mostly optimism and expectations not real supply demand. The long term treasury rates are down, but as with oil this could largely be newly awakened appetite for risk – how much time all the investors would want to keep money at under 3% for 10 years. There was a bubble in treasuries due to panic, now panic is over and investors are leaving treasuries. How long this will last – nobody knows.

    So for the moment, I am trying to hedge my bets. I wouldn’t expect high inflation this year though. Or next year for that matter. In 2-5 years? Maybe.

  3. TMN says:

    TML, you keep saying this, but I still haven’t seen you explain where the money to cause inflation is going to come from. The amount of money we’re printing is a drop in the bucket compared to the amount of wealth that drained out of the economy with the collapse of the stock and real estate bubbles. And it’s not like anyone’s eager to start lending again, so that’s out too. So where’s it going to come from?

  4. TMN says:

    That still doesn’t answer the question. When everyone was buying on credit, or using equity drawn out of inflated housing prices, things were more expensive. That’s collapsed, and the amount of total reduction in the monetary supply is in the tens of trillions at least. 300 billion of government printing isn’t going to touch that.

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