Over the course of the past year or so inflation has gone from a non-issue to “transient” to a daily reality. The latest reading on the Consumer Price Index (CPI) saw a year-over-year increase of 8.3%, and this was actually an improvement from the month before when the CPI rose 8.5% year-over-year.
When it comes to rising prices, the phrase “highest in forty years” has lately been pounded into the minds of investors. For some, for many even, that forty years is a lifetime (or more). They have no experience managing through a period of inflation. The old idea – buy gold – has not really proven to be very effective. The newer ideas, like buy Bitcoin, have so far not done much better.
Contrary to what many think, Gold returns have generally not been closely correlated with rising inflation. A Reuters story (Reuters; 2/2/22) noted that since 1971 only 16% of the variation in gold prices can be explained by changes in the CPI. And, as Warren Buffet and others have said, gold pays no dividends. Bitcoin (CoinDesk 5/25/22), too, has been disappointing as an inflation hedge. A year ago it traded at around $43,000. Twelve months and a year of record inflation later, it goes for about $30,000. No dividend there, either.
So if not gold, if not Bitcoin where should an investor look for an effective inflation hedge? We think the answer can be found in a multi-asset portfolio consisting of building blocks from three major asset classes: TIPS (Treasury inflation-protected securities), equities, and commodities. Our fund, the IQ Real Return ETF, seeks to track the price and yield performance of the Bloomberg IQ MultiAsset Inflation Index. This results in a multi-asset portfolio which includes commodity and equity assets expected to benefit directly or indirectly from increases in the prices of goods and services.
Unlike gold and bitcoin, commodity prices have seen a sustained rise over the past year. The Bloomberg Commodity Index was up about 40% for the trailing 12 months through mid-May. While there have been a few unique circumstances behind this – specifically the war in Ukraine and its impact on grain and oil prices – commodities have historically done well during periods of inflation.
TIPS, which typically make up the majority of the ETF’s portfolio holdings, are government backed bonds where the value of the principal rises with inflation as measured by the CPI. They pay interest twice a year at a fixed rate applied to the adjusted principal. Like the principal, interest payments rise with inflation. Large-cap U.S. equities are the third major asset class held by the ETF. Holdings here are selected using a modified market capitalization methodology and are intended to provide exposure to sectors expected to benefit from inflation.
One trip to the gas pump or the grocery store is enough to drive home the real-life impact of rising inflation. For those looking for a hedge, our ETF offers what we believe is a compelling multi-asset alternative.
Past performance is no guarantee of future results, which will vary. All investments are subject to market risk and will fluctuate in value.
Click on the fund name for the most current fund page, which includes, the prospectus, investment objectives, performance, risk, and other important information. Returns represent past performance which is no guarantee of future results. Current performance may be lower or higher. Investment return and principal value will fluctuate, and shares, when redeemed, may be worth more or less than their original cost. Visit nylinvestments.com/etfs and nylinvestments.com/funds and for the most recent month-end performance.
This material represents an assessment of the market environment as at a specific date; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any issuer or security in particular.
The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective.
This material contains general information only and does not take into account an individual's financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision.
The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.
The Bloomberg Commodity Index (BCOM) is a broadly diversified commodity price index distributed by Bloomberg Index Services Limited.
The Bloomberg IQ Multi-Asset Inflation Index is designed to give exposure to inflation-sensitive underlying securities and track the performance of weighted long positions across equity, fixed income and commodities.
“New York Life Investments” is both a service mark, and the common trade name, of certain investment advisors affiliated with New York Life Insurance Company. IndexIQ® is an indirect wholly owned subsidiary of New York Life Investment Management Holdings LLC and serves as the advisor to the IndexIQ ETFs. ALPS Distributors, Inc. (ALPS) is the principal underwriter of the ETFs. NYLIFE Distributors LLC is a distributor of the ETFs. NYLIFE Distributors LLC is located at 30 Hudson Street, Jersey City, NJ 07302. ALPS Distributors, Inc. is not affiliated with NYLIFE Distributors LLC. NYLIFE Distributors LLC is a Member FINRA/SIPC.