Tuesday, May 26, 2009

Investing in WIP: Foreign Inflation Protected Securities

I recently sold out of my US bond portfolios, because I believe inflation is coming and that is going to hurt bond prices in the near future.  These were a nice safe harbor during the downturn relative to my other investments, and I wish I had more in them.  Barack Obama did what he had to do in using a vigorous Keynesian policy to get the economy re-booted.  But he basically printed money.  I can't see foreign treasuries continuing to have the same level of demand for the dollar.  

The value of these bonds will begin to fall as soon as the economy starts to heat up, so I decided to move now.  I was considering moving this money to Treasury Inflation Protected Securities (TIPS).  However, after reading this article about a key problem with TIPS, I am re-considering.  

I am going to go with WIP, an international inflation protected treasury exchange traded fund.  While there is some intrinsic risk in a major government bond default, I think that getting the protection of the central banks, the IMF and inflation safeguard make this fund a strong choice.   Additionally, the WIP ETF has a relatively high yield.  

This article does a nice job explaining the benefits of WIP in greater detail.  Here are some key snippets.

Holdings: The largest holdings in WIP are in the developed markets and in Euros and Pounds Sterling. The fund holds a wide basket of currencies including 31% in emerging markets (Brazil, Poland, Mexico, Turkey, South Africa, Chile, Korea, and Israel)

Default Risk: Even though developed country sovereign treasuries are generally considered safe, the funds holdings are at greater risk for default than the US.  The riskiest assets in the fund are in Greece (4.33% of total fund assets) and Italy (4.84%) both are currently considered to be the Euro-area’s “sovereign debtors most likely to default.”

I think the default risk in Greece and Italy is overblown, and if nothing else, these bonds can be  milked for their yield.  Furthermore, I believe that global demand for gold will not match US demand for gold, and prices will stay flat against inflation.

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