USA TODAY markets reporter Matt Krantz answers a different reader question every weekday. To submit a question, e-mail Matt at mkrantz@usatoday.com.
Q: Are TIPS good protection against inflation?
A: Investors have been predicting skyrocketing inflation for years. They've been wrong.
But that hasn't stopped investors from looking for inflation protection. When they do, they target the most obvious place: Treasury Inflation Protected Securities, or TIPS. These unique government securities pay a coupon rate of interest plus an inflation adjustment.
Are TIPS a good protection from inflation? No, "it's a horrible idea," says Bill Larkin of Cabot Money Management. Investors have crowded into 10-year TIPS, pushing their yields down to 0%, he says. The only way to make money is through the inflation adjustment, which may never pan out due to globalization, which tends to keep inflation down. Inflation would have to rise to 2.5% to get a 0.9% yield on a 10-year TIPS, he says.
Investors looking for relatively low-risk returns and protection from inflation need to be more creative. One option to consider is the SPDR DB International Government inflation protected bond exchange traded fund (WIP), he says. This investment makes money if inflation-adjusted bonds outside the U.S. gain.
Another option is the iShares Floating Rate Note ETF (FLOT), or the Eaton Vance Floating Rate ETF (EABLX). While not as safe as government securities, these investments own secured loans that should gain in value if interest rates rise, Larkin says.
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