Welcome to the Wealth Daily Weekend Edition — our insights from the week in investing and links to our most-read Wealth Daily and sister publication articles.
Free of the dock, QE2 is about to leave the harbor.
Never mind the fact that these are completely uncharted waters; Chairman Ben sleeps tight tonight believing that his theories will eventually fill the sails.
However, there is at least one aspect of this voyage that everyone can agree on…
At some point in the future, this mountain of cash will be inflationary on a pretty large scale.
After all, inflation is the destination. Just ask Captain Ben.
In case you missed it, he’s been shouting it from a bullhorn for the past 6 weeks now.
That’s why the price of gold and other commodities is edging higher, as smart investors work to hedge themselves against these characters, their grand plans, and their printing presses.
But let’s face it: Gold isn’t necessarily for everyone. As a commodity, it can be highly volatile.
That’s why more conservative investors are now moving a portion of their portfolios into Treasury Inflation Protected Securities as a way to combat future higher prices. You may know them as TIPS.
TIPS protect against inflation
Like all Treasuries, TIPS are debt instruments issued by your own Uncle Sam.
Essentially, he sells them to spend money he does not have. As with other Treasuries, they pay interest every six months and return the principal when the security matures.
However, the difference with TIPS is the coupon payments and underlying principal are automatically increased to compensate for inflation as measured by the consumer price index (CPI). So when inflation returns and the CPI rises, the coupon payments of TIPS and the underlying principal automatically increase.
That makes the win here twofold, since not only are TIPS based on one of the safest investments — U.S. Treasuries — but they are also hedged against inflation. So the real rate of return is guaranteed.
For example, let’s assume that inflation goes through the roof next year and hits 10%…
If that were the case, an investor who purchased $1,000 in U.S. TIPS carrying a 3% coupon would see his principal automatically grow by 10% to $1,100. Moreover, because the coupon payment is based on the principal amount, the interest payment would also edge higher.
Nominal U.S. Treasuries, meanwhile, offer no such protection. That’s why any whiff of inflation is a Treasury investor’s worst nightmare.
Deflation is more their style.
As a result, TIPS share an inverse relationship with “regular” U.S. Treasuries. So as the bond bubble begins to burst, TIPS will naturally rally.
The downside to treasury inflation protected securities, though, is pretty simple: The CPI needs to go up, which it hasn’t done much of over the last two years.
However, it’s important to note that your principal with TIPS is 100% protected — that’s why they offer a safer alternative to the wild price swings of gold.
How to invest in treasury inflation protected securities
These securities can be purchased either directly from the U.S. Treasury or through a bank, broker, or dealer through the auction process based on their yield.
As an alternative to the direct purchase route, there are also bond funds available to investors that match the performance of the TIPS themselves. Typically these high-quality funds and ETFs will invest at least 80% of their funds in inflation-protected bonds.
The upside with these funds is that their investors get the added benefit of professional management. Moreover, these funds offer the liquidity that most investors need.
Here are two inflation-protected bond funds that closely match the performance of TIPS themselves:
- Vanguard Inflation-Protected Secs (MUTF: VIPSX): The fund invests at least 80% of assets in inflation-indexed bonds issued by the U.S. government. It may invest in bonds of any maturity, though the fund typically maintains a dollar-weighted average maturity of 7-20 years.
- iShares Lehman TIPS Bond (ETF) (NYSE: TIP): The fund invests at least 90% of its assets in the inflation-protected bonds and at least 95% of its assets in U.S. government bonds. It may also invest up to 10% of its assets in U.S. government bonds not included in the underlying index. Additionally, the fund invests up to 5% of its assets in repurchase agreements collateralized by U.S. government obligations and in cash and cash equivalents.
So while we all sit and wonder if the Fed’s latest scheme will do the trick, the consequences of it all can be found just over the horizon.
Unfortunately, they include much higher prices…
After all, Captain Ben’s trip to Atlantis is just warming up. You can count on that.
As for some other places to invest your hard-earned labor, here are a few of the best investment ideas from the pages of this week’s top-read Wealth Daily and Energy & Capital articles.
Have a great weekend.
Your bargain-hunting analyst,
Editor, Wealth Daily
Bull Market Mania: Ground Floor Investing In Gold
Editor Luke Burgess explores highlights of China’s booming gold market and puts you on the trail of a mining pick for the ages.
Sri Lanka Boom Times: Tamil Tiger Peace Divided
Editor Chris DeHaemer explains why it’s boom or bust for Sri Lanka.
Bad News for Oil Drilling in Mexico: They Don’t Have No Oil, Let the MF’er Burn
Editor Keith Kohl explains why investors can still expect big profits from oil stocks.
Wind Powered Profits: 20 Years of Non-Stop Revenue
Editor Jeff Siegel explains why this wind energy stock could deliver big gains in the next four months.
China Flexes Rare Earth Muscles: The Middle Kingdom Plays its Trump Card
Publisher Brian Hicks tells readers why recent events between two ancient Eastern rivals are a linchpin in the rare earth metals story, and how investors can now be poised for profit.
The 2010 U.S. Agflation Outlook: Why Your Food Bill Could Rocket in November
Editor Ian Cooper takes a look at current agflation fears and offers readers ways to profit
Dow 20,000: Goodbye, Dollar
Editor Christian DeHaemer explains to readers why the Dow will, in fact, reach its “magic number”… and what this means for our national debt.
Cancer Vaccine Stocks: A Winning Play in the Long Road Ahead
Editor Steve Christ looks at the race for the cure, explaining how cancer vaccines are helping to change the long-term outlook for the dreaded disease.
Google Invests in Automated Cars: Yet Another Reason to Own GOOG
Analyst Adam Sharp examines Google’s automated “self-driving” cars. Is it a smart investment or a waste of capital for GOOG shareholders?
Military Green Energy: How the Military’s Energy Transition Can Make You Rich
Editor Jeff Siegel discusses the military’s latest efforts to transition away from fossil fuels.
Investing in Diet Stocks: The Seasonal Diet Stock that Runs Every Year
Editor Ian Cooper uncovers the seasonal “baggage” stocks that historically run this part of year.
Top 3 Aluminum Stocks to Play Soaring Demand in China: Aluminum Imports to China Expected to Jump 2,446% in 5 Years
Editor Luke Burgess reveals the top three stocks to play soaring demand for aluminum and aluminum-based products in China.