Q&A With Gordon Pape: Hedging Against Inflation

With more commentators raising the possibility of increasing inflation, is it time to buy Treasury Inflation Protected Securities?

Q – I would like to know what United States TIPS funds (Treasury Inflation Protected Securities) I can buy in Canada. I am a Canadian citizen, resident in Canada. With U.S. interest rates rising, growing GDP, good corporate profits, low unemployment, and expected wage increases, more commentators are raising the possibility of increasing inflation. At present TIPS prices are low because most people still do not believe in the prospect of inflation. I do believe in the return of inflation and this could be a good time to buy TIPS funds while prices are still low. – Chris C.

A – I don’t know of any Canadian company that offers these funds based on U.S. bonds but there is nothing to prevent you from buying them in New York. The largest fund of this type is the iShares TIPS Bond ETF (NYSE: TIP), which has about $24 billion in assets. It invests in a portfolio of inflation-protected U.S. Treasury bonds with an effective duration of 7.58 years. As of Dec. 26, the fund had generated a total return of 2.21 per cent for 2017. Distributions are paid monthly and can vary significantly. For more details go here.

There are a number of bond funds and ETFs sold in here that use Canadian inflation-protected securities. As you might expect, returns have been weak in the low-inflation environment in recent years, The collective five-year average annual compound rate of return is -24 per cent. Longer term, which covers inflation from the period before the Great Recession, the results are better with a 20-year average annual gain of just over five per cent. – G.P.