Hedging Inflation - TIPs/REITs/Commodities

[aw78]

I was looking to add commodities to my allocation, though all of commodity funds I found have absurdly high fees/expense ratios. So, I was thinking about just increasing my allocation to TIPs. I would think that the two correlate pretty highly in the long-run.

I think that holding REITs, Commodities, and TIPs are an attempt to hedge inflation. What are the added benefits to holding REITs vs Commodities vs TIPs? Diversification? REITs and TIPs pay out a current income stream and Commodities do not. I think that people like the idea of investing in tangible assets as well.

Any thoughts on this?

 

[brewer12345]

There's lots of research out there to peruse, but I note that DJP is a new, lower cost alternative that is also tax efficient. There is also now an ishares commodity fund, GSG, but it tracks the Goldman index rather than the DJ-AIG index.

 

[mathjak107]

i bought gsg 2 days ago.............for a conservative approach fidelity strategic real return is not bad,,,roughly equal splits between commodities,tips,reits and floating rate loans

 

[Spanky]

GSG holds 75% energy - essentially an energy fund. Expense ratio of 0.75% is quite reasonable.

 

[mathjak107]

gsg is interesting..it weights by world production and importance...right now energy is about 75%....the rest is made up of very diverse commodities,especially when compared to the narrow index of dbc....

 

[brewer12345]

gsg is interesting..it weights by world production and importance...right now energy is about 75%....the rest is made up of very diverse commodities,especially when compared to the narrow index of dbc....

I prefer the more diversified DJ-AIG ndex to the goldman index. It is more broadly weighted wthout the huge bet on energy. But in truth, both indexes are fairly highly correlated with energy prices.

 

[heyyou]

aw78--Last year, Scott Burns reviewed a report on inflation. There are multiple causes/types, with different hedges for each. TIPS work somewhat(gov't determines inflation rate), commodities work against sudden inflation from shortages of natural resources, and a higher equity allocation helps since businesses can pass through inflation triggered rate increases(in theory). Can't find it now, so no link.
Joe

 

[unclemick]

Hmmm

For the dedicated slice and dicers - a read over at Raddr's research section on ScV and Commodities and EAFE even might prove useful to some - depending on how you have your portfolio structured - PCRIX is featured as a way of doing commodities.

Interesting stuff.

heh heh heh

 

[Gone4Good]

I was looking to add commodities to my allocation, though all of commodity funds I found have absurdly high fees/expense ratios. So, I was thinking about just increasing my allocation to TIPs. I would think that the two correlate pretty highly in the long-run.

Any thoughts on this?

With Vanguard Inflation Protected Securities fund yielding about 2.3%, TIPS seem to be on the "rich side of fairly valued" relative to plain old treasuries. That is to say they are slightly expensive IMO, but not dramatically so. I think at current levels TIPS can be used to diversify a healthy portion of your bond portfolio. I, however, wouldn't add them as a substitution for equities.

Commodities are probably a good portfolio diversifier but have already had an amazing run. I'm always loath to buy anything that that has the "flavor of the month" feel that commodities do right now. I'm more than happy to sit on the sidelines watching all the "smart money" clean up in commodities. When and if they fall back to reasonable levels (and are once again out of favor) I'll probably add 5% or so to the portfolio.