Gold, TIPS, bitcoin and alternative ETFs were not the inflation hedges they were supposed to be.


You may want to consider selling your inflation hedges. In this coming Thursday’s Consumer Price Index report, U.S. inflation is forecast to continue its recent moderating trend (7.9%, down from the previous month’s 8.2% annual rate and June’s 9.0%, according to economists polled by the Wall Street Journal). until).

Moreover, inflation hedges may not be a great investment even when inflation is running high. Consider some of these popular investments touted as inflation hedges:

  • Gold GC00,
    -0.38%
    The SPDR Gold Shares ETF has posted an annual loss of 6.8% since the start of last year, as measured by GLD,
    -0.40%
    —Despite US inflation’s 12-month rate of change rising from 1.3% at the start of 2021 to 8.2% currently. SPDR Gold Shares’ real or inflation-adjusted return since January 2021 has been minus 14.3% annually.

  • Bitcoin BTCUSD,
    -4.64%
    did even worse: its real return during this same period was negative 24.1% per annum.

  • Treasury Inflation-Protected Securities (TIPS) fared even worse. While their returns are tied to inflation until maturity, their prices fluctuate over shorter periods of time – sometimes dramatically. Long-term TIPS, as rated by PIMCO’s 15+ Year US TIPS Index ETF LTPZ,
    +0.07%
    Z], has posted an annualized loss of 25.2% since the start of 2021.

While these losses are surprising, exchange-traded funds designed to take more sophisticated approaches to inflation hedging are more average at best. Inflation-hedged ETFs that have done the best over the past year have generally not done so well over the long term — and vice versa.

This is a very important point because it is relatively easy to develop a strategy that will perform well in a given situation. It is quite another to develop a strategy that not only does this, but also performs well over the long term.

A good example is the simplified Interest Rate Hedging ETF PFIX,
+2.39%,
It is designed as the functional equivalent of investing in long put options on 20-year US Treasury bonds. Given that 20-year T-Bonds TMUBMUSD20Y,
4.560%
has fallen over the past year as interest rates have risen, this ETF has performed spectacularly – up 109.0% over the past 12 months. Since this ETF was created in early 2021, we don’t have longer-term returns for it, but we know it wouldn’t have come close to its recent returns. For example, the yield on the 20-year Treasury is lower today than it was in 2009. Thus, if the Simplify ETF had existed since then, it would almost certainly have suffered a total loss.

The chart below shows the 1-, 3-, 5-, and 10-year returns of three leading ETFs designed to generate long-term real returns. Note that on the one hand, the ETF with the best real return over the past year – ProShares Inflation Expectations ETF RINF,
+2.11%
— nevertheless, it has faced losses in the last 10 years. Meanwhile, the ETF with the best 10-year return, SPDR SSGA Multi-Asset Real Return ETF RLY,
-0.11%
– lost positions in the last 12 months.

The best long-term inflation hedge

This trade-off between the short and long run is expected to continue to affect inflation hedges in the future. For example, when inflation worsens, an investment that performs reliably in the short term is likely to produce disappointing long-term real returns, and vice versa.

Take stocks for example. Of all the major asset classes, they have outperformed inflation the most – for the longest time. But stocks are among the worst performers when inflation heats up in the short term. The bottom line, as simple as it sounds, is that you can’t have your cake and eat it too.

Mark Hulbert is a regular contributor to MarketWatch. Its Hulbert Ratings track investment newsletters that pay a flat fee for verification. You can apply to him mark@hulbertratings.com

Also read: One analyst says stocks are trading where they were five months ago, which could mean they’re poised for more gains.



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