Inflation has been low for many years, so it is easy to ignore. However, it can still do serious damage over time. For example, inflation that averages the Federal Reserve's target of 2% would reduce a dollar's buying power to $0.67 after 20 years.
Fortunately, Treasury Inflation-Protected Securities provide a way to fight back inflation risk. The principal of TIPS will move in tandem with inflation. It goes up with inflation and goes down with deflation. Once the bond matures, investors receive either the adjusted principal or the original principal, whichever is higher. This means that extended periods of deflation will not erode the principal. PIMCO 1-5 Year U.S. TIPS Index ETF (STPZ) is a good option for inflation protection.
To view this article, become a Morningstar Basic member.
Phillip Yoo does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.