Are Inflation ETFs For You? (CPI, GRES)

This week marks the launch of two new exchange traded funds, both of which intend to offer investors a direct hedge against inflation.  IndexIQ introduced the IQ CPI Inflation Hedged ETF (NYSE: CPI) and also introduced the IQ ARB Global Resources ETF (NYSE: GRES).

Investors generally need to seek investment returns that outpace inflation if they want to be up net-net throughout their lives.  That being said, it will be interesting to see how these measure through time.  In theory, these could offer Joe Public more hedging instruments for or against other investments used to beat the eroding factor of inflation down the road.  One of these ETF products, the CPI trade, is very easy to factor in the moves. The other, the GRES trade, is likely to be more complex than what many retail investors may care about; and what many institutions may aim to achieve on their own.

The IQ CPI Inflation Hedged ETF seeks to replicate the performance of the IQ CPI Inflation Hedged Index with a real return above the Consumer Price Index, before fees and expenses of course.

The IQ ARB Global Resources ETF seeks hedge against inflation and a real return through exposure to a diversified portfolio of commodity-related equities that represent asset classes affected by changes in inflation, such as equities, fixed income, commodities, currencies, and real estate. This is meant to identify global companies that operate in eight commodity-specific market segments and whose equity securities trade in IQ CPI and IQ ARB Global Resources ETFs.  This one has a broad diversification: livestock; precious metals; grains, food and fiber; energy; industrial metals; timber; water; and coal. It also includes short exposure to global equities as a partial equity market hedge.

Some ETFs are liquid and the demand is easy to see and the performance is easy to track.  Other ETFs are somewhat glorified hedge funds or mutual funds.  You’ll have to decide on your own which side of the coin to take.

JON C. OGG
OCTOBER 28, 2009