If you weren’t worried about inflation before, a new number from the United States should have made you at least a little nervous.
According to the U.S. Bureau of Labour Statistics, the cost of living in that country jumped 6.2 per cent in October on a year-over-year basis. That’s the largest leap since 1990, more than three decades ago, and it blew away analysts’ estimates of 5.8 per cent.
Canada’s CPI for October has yet to be released, but it’s likely to show a big jump over September’s 4.4 per cent.
Both the Bank of Canada and the U.S. Federal Reserve Board have modified their earlier positions that the inflation flare-up was “transitory.” At this point, no one can predict just how long it will last or how high it will go. All we know for certain is that the supply chain bottlenecks and labour shortages that are partially responsible for cost increases aren’t going away soon.
Investors are struggling with finding ways to protect their assets from the erosion in buying power that inflation represents. Gold, once a traditional haven against rising prices, has made a modest upward move recently, but nothing dramatic.
Bitcoin and other cryptocurrencies seem to be favoured over gold by some investors. The Purpose Bitcoin ETF (BTCC-T), the first of its kind in the world, is extremely volatile but has moved sharply higher recently. In late September it was trading in the $8.50 range. It closed Friday at $13.17, a gain of 55 per cent in six weeks.
Those ups and downs may induce too much stress in some investors. They would probably be more comfortable with securities that invest in hard assets, like real estate investment trusts. As of Nov. 11, the S&P/TSX Capped REIT Index was up 28.5 per cent year-to-date.
Two fund companies think real return bonds offer an answer for conservative investors. Bonds as an asset class have fared badly this year as rising yields have knocked down prices. But real return bonds are indexed to inflation, both for principal and interest.
CI recently launched its U.S. Treasury Inflation-Linked Bond Index ETF (CAD-Hedged) (CTIP-NE). It invests in a portfolio of Treasury Inflation-Protected Securities (TIPS) that are issued and backed by the U.S. government.
TIPS have outperformed other fixed income sectors, including U.S. Treasuries, by six percentage points year-to-date as a result of higher inflation expectations. In general, TIPS tend to outperform Treasuries if inflation expectations are high, and vice-versa.
CTIP was launched in late August, so we have little history to work with. Between that date and Nov. 11, the fund posted a gain of 1.8 per cent. That’s good for a bond fund in this environment, but stock market investors won’t be impressed. The management fee is 0.15 per cent and the fund is currency hedged.
To date, the ETF hasn’t caught on with investors, with only $17.3-million in assets.
Mackenzie Financial has a similar fund with a longer track record. It’s called Mackenzie U.S. TIPS Index ETF (CAD-Hedged) and trades as QTIP, also on the NEO Exchange. Launched in January, 2018, this is a much larger fund with assets of just over $600-million.
Returns are impressive for a bond fund. While most bond ETFs have struggled, this one posted a year-to-date gain of 4.3 per cent to Oct. 29. The three-year average annual compound rate of return to the same date was 7.6 per cent. The fund makes monthly distributions, which totalled $7.97 in 2020. Of that, almost 70 per cent was taxed at the capital gains rate.
The management expense ratio is 0.17 per cent.
Both these funds would be good choices for conservative investors looking to add some inflation protection to their portfolio. The Mackenzie ETF closed on Friday at $110.13 while the CI fund finished at $20.36.
If inflation continues to climb higher, then both of these TIPS funds should continue to outperform. But if inflation starts to ease back, it will be time to move on.
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