Central banks around the world continue to print money with no
end in sight. For many investors, the inflation question is not
"if," but "when." Can real-return
ETFs provide a truly massive range of inflation-fighting tools,
including TIPS, REITs and commodities. But not everyone has the
time or inclination to put these powerful building blocks into a
strategy that works for them.
That's where a trio of off-the-shelf inflation-fighting ETFs
comes in. They are the IQ Real Return ETF (NYSEArca:CPI), the
WisdomTree Global Real Return ETF (NYSEArca:RRF) and the SPDR SSgA
Multi-Asset Real Return ETF (NYSEArca:RLY).
These products are expressly designed to provide one-stop
shopping for investors looking to preserve capital while earning
so-called real returns-returns over the rate of inflation.
By the way, I'm not discussing the PowerShares DB US Inflation
ETN (NYSEArca:INFL) or the ProShares 30 Year TIPS/TSY Spread ETF
(NYSEArca:RINF), as these securities are designed to rise and fall
with the market's expectation of inflation rather than to provide
So how do the real-return ETFs work and what do they hold? And
are they ownable and tradable?
I'll take a quick look at the three funds-CPI, RRF and RLY-with
these questions in mind.
Launched in October 2009, Index IQ's CPI is the oldest and most
conservative of the bunch. Two-thirds of the fund is deployed in
Treasury bills, which helps to preserve capital but doesn't do much
for returns above inflation. For that, CPI depends on roughly 10
percent stakes in U.S. equities, gold and long-dated Treasurys. It
avoids commodities other than gold, and its positions in REITs are
The chart below paints CPI as the "steady Eddie" of the bunch,
meaning it has provided extremely low volatility and small positive
CPI has an annual fee of 71 basis points, $50 million in assets
and trades at spreads of 19 basis points. That makes it ownable and
tradable in my view, but I acknowledge that a 71 bp fee-$71 for
each $10,000 invested-is a real drag on a low-risk, low-return
strategy and that some investors require a larger and more liquid
WisdomTree's RRF offers a different take on the space. The
"Global" in the fund's name isn't for show:Inflation-linked bonds
from around the globe dominate the fund's 70 percent fixed-income
allocation. These bonds come with higher yield than U.S. TIPS, but
carry exchange rate risk too.
RRF goes whole-hog into commodities too-its 30 percent stake is
well diversified across energy, precious and industrial metals,
softs and livestock.
However, investors have given RRF the cold shoulder since its
July 2011 launch.
The fund goes for days a time without trading a single share,
and assets under management are tiny-$5 million. For me, this takes
it out of consideration.
State Street's RLY
Newcomer RLY from State Street offers a bolder approach.
A third of its exposure is in global natural resources, a play
on demand-driven commodities via equities. RLY gets this exposure
from a single ETF, the SPDR S&P Global Natural Resources ETF
I don't have any problem with the concentration in this case or
the fund-of-funds approach, which is also used by CPI.
In addition, RLY takes positions in broad commodity, metal and
agricultural ETFs. REITS loom largely here too, while fixed income
takes a backseat at only about 20 percent. RLY's basket sounds much
more volatile than staid CPI-and it is, as we'll see below.
Despite its late-to-the-party status, the fund has attracted
assets and liquidity on par with CPI, if not better, and has an
annual fee of 70 basis points.
Here's a chart of total returns for the three funds since the
inception of newcomer RLY on April 25, 2012.
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