Rising inflation may leave investors wondering whether they should keep fixed income out of their portfolios, but history shows Treasury Inflation-Protected Securities (TIPS) can be a useful tool to hedge against inflation.1
TIPS outperformed inflation2 in 72% of the rolling, overlapping 12-month periods from 2001 to 20213 (see Exhibit 1).4 Put another way, TIPS helped investors preserve their purchasing power in nearly three out of four of the 252 rolling one-year periods over this 20-year span, according to Dimensional research.
However, like all bonds, TIPS can be affected by changes in interest rates. When rates rise, the prices of existing bonds fall as new bonds issued with higher rates become more attractive. That means the total return of an inflation-protected security can be higher or lower than the annual inflation adjustment.
Still, for investors determined to protect their purchasing power as inflation rises, TIPS can be an effective option.