An Inflation Play as Good as -- or Better Than -- Gold

TIPS are not as good as gold when it comes to fighting inflation. In many respects, they are even better.

Treasury Inflation Protected Securities, or TIPS, are designed to protect investors from the erosion of purchasing power that rising inflation can cause. In an inflationary environment, TIPS, which pay a semiannual coupon, tend to outperform most traditional fixed-income investments, because their par value is adjusted to account for changes in the consumer price index.

For instance, if the CPI rises by 0.2%, the value of the TIPS bond would also climb by 0.2%. If the CPI were to decline, the bond's value would fall very little, because the government guarantees the original investment.

Gold, on the other hand, does not pay a dividend . Until it is sold, gold bullion just languishes in a safety deposit box, while the metal succumbs to the market's price swings. And despite its recent run up through the $720 mark, gold is not the all-encompassing, "pure play" answer to inflation many investors think it is.

"Gold is influenced by a lot of other factors and drivers, like industrial and consumer use," says Ken Volpert, portfolio manager of the $10.6 billion (VIPSX Quote)Vanguard Inflation-Protected Securities fund, in a recent Street.com TV interview. "If it's inflation you are worried about, then TIPS are what you want."

Want more? Check out TheStreet.com TV video. Ken Volpert, of the Vanguard Inflation Protected Securities fund, explains the benefit of TIPS.

And a lot of people have been wanting TIPS lately. The average TIPS fund is up 4.9% year-to-date, according to Morningstar, making it the top performer in the fixed-income category.

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