​A Global Bond ETF for Inflation Protection

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SPDR Citi International Government Inflation-Protected Bond ETF (WIP) seeks to provide results that correspond to the price and yield performance of the Citi International Inflation-Linked Securities Select Index, explains John Persinos, editor of Personal Finance.

The index is designed to measure the total return performance of inflation-linked bonds outside the U.S. with fixed-rate coupon payments that are linked to an inflation index.

Now’s the time to take defensive measures against global inflation. SPDR Citi International Government Inflation-Protected Bond ETF should be one of those hedges.

After a long period of dormancy, global inflation shows signs of stirring. Global expansion proceeds apace. For the first time since 2010, global growth is “synchronized.” Generally speaking, every region is growing.

The December euro zone final manufacturing purchasing managers’ index (PMI) came in at 60.6, the highest since the survey began in June 1997. Any figure above 50 represents growth.

Germany and France, the euro zone’s two largest economies, hit their highest manufacturing PMI numbers on record for 17 years. In China, manufacturing growth unexpectedly picked up to a four-month high in December. New orders in the Middle Kingdom are soaring. The country’s producer price index (PPI) is picking up, too.

There’s a historical link between movements in China’s PPI and the consumer price indices (CPIs) in the curo zone, the U.S. and the U.K. Inflation also will likely flare up in emerging countries due to rising commodity and food prices and wage pressure.

WIP provides exposure to inflation-linked bonds of developed and emerging market countries outside of the U.S. As such, this ETF should hedge your portfolio against the erosion of purchasing power due to overseas inflation.

The fund holds a basket of about 100 foreign, investment-grade, inflation-protected bonds. These are repriced according to inflation levels in those countries, and all of the holdings are priced in currencies other than the dollar.

The fund currently yields about 0.82%, but if global inflation rises or the dollar weakens, the yield will rise as the value of the payouts increases. The fund is one of the best dollar hedges you can find.

WIP is diversified across several countries, which means that it’s not overly dependent on the continued stability or creditworthiness of any particular government. The top countries in terms of asset weightings include the major economies of Spain, Japan, Brazil, Germany and the U.K.

Because it’s invested in government debt outside of the U.S., WIP offers the solid protection of highly rated bonds. It’s also a bet that inflation will be generally higher outside of the U.S. than within the U.S., which has typically been true in this century.

WIP’s year-to-date return is nearly 12%. We expect strong returns, combined with inflation protection, from this ETF in 2018 as the global economy shows signs of overheating. You need to buy inflation hedges now, before the rest of the crowd realizes the magnitude of the threat and bids up the prices of these assets.

John Persinos is editor of Personal Finance.

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