A Multi-Asset Approach to Managing the Impact of Inflation

Written by: New York Life Investments

Over the course of the past year or so inflation has gone from a non-issue to “transient” to a daily reality. The latest reading on the Consumer Price Index (CPI) saw a year-over-year increase of 8.3%, and this was actually an improvement from the month before when the CPI rose 8.5% year-over-year.

When it comes to rising prices, the phrase “highest in forty years” has lately been pounded into the minds of investors. For some, for many even, that forty years is a lifetime (or more). They have no experience managing through a period of inflation. The old idea – buy gold – has not really proven to be very effective. The newer ideas, like buy Bitcoin, have so far not done much better.

Contrary to what many think, Gold returns have generally not been closely correlated with rising inflation. A Reuters story (Reuters; 2/2/22) noted that since 1971 only 16% of the variation in gold prices can be explained by changes in the CPI. And, as Warren Buffet and others have said, gold pays no dividends. Bitcoin (CoinDesk 5/25/22), too, has been disappointing as an inflation hedge. A year ago it traded at around $43,000. Twelve months and a year of record inflation later, it goes for about $30,000. No dividend there, either.

So if not gold, if not Bitcoin where should an investor look for an effective inflation hedge? We think the answer can be found in a multi-asset portfolio consisting of building blocks from three major asset classes: TIPS (Treasury inflation-protected securities), equities, and commodities. Our fund, the IQ Real Return ETF, seeks to track the price and yield performance of the Bloomberg IQ MultiAsset Inflation Index. This results in a multi-asset portfolio which includes commodity and equity assets expected to benefit directly or indirectly from increases in the prices of goods and services.

Unlike gold and bitcoin, commodity prices have seen a sustained rise over the past year. The Bloomberg Commodity Index was up about 40% for the trailing 12 months through mid-May. While there have been a few unique circumstances behind this – specifically the war in Ukraine and its impact on grain and oil prices – commodities have historically done well during periods of inflation.

TIPS, which typically make up the majority of the ETF’s portfolio holdings, are government backed bonds where the value of the principal rises with inflation as measured by the CPI. They pay interest twice a year at a fixed rate applied to the adjusted principal. Like the principal, interest payments rise with inflation.  Large-cap U.S. equities are the third major asset class held by the ETF. Holdings here are selected using a modified market capitalization methodology and are intended to provide exposure to sectors expected to benefit from inflation.

One trip to the gas pump or the grocery store is enough to drive home the real-life impact of rising inflation. For those looking for a hedge, our ETF offers what we believe is a compelling multi-asset alternative. 

Related: Inflation Is Drag on Retirees, But Its Impact Varies