A TIP for the Inflation-Wary ETF Trader

In a universe of ETFs that covers everything from timber -- Claymore/Clear Global Timber(CUT) -- to Taiwan -- iShares MSCI Taiwan Index(EWT) -- investors are seeking protection as well as opportunity.

The iShares Barclays TIPS Bond (TIP) Fund is one of the more conservative portfolio choices that equity-wary investors have added to their ETF picks as the question of inflation looms larger on the horizon. TIP tracks an index of U.S. Treasury inflation-protected securities (TIPS) that have at least one year remaining to maturity, an investment-grade rating and more than a $250 million face value.

Inflation, or at least the fear of inflation, could be the result of the hefty stimulus package proposed by the current administration. A recent Bloomberg News survey of 57 economists suggested that U.S. consumer prices may rise 1.6 percent in 2010.

While TIPS pay a lower coupon than regular Treasuries, the advantages in an inflation-fearful economy may be worth the wait. According to the Merrill Lynch bond indices, regular Treasuries have lost 3.9 percent including interest payments this year while TIPS have returned 3.6 percent.

Many of the short-term Treasury-trading strategies involve more analysis and practical obstacles than an individual investor can commit. TIP, on the other hand, represents a "big picture" strategy -- it can be a long-term statement on the impacts of the current monetary policy.

TIP is a good middle-of-the-road investment for individuals who fear inflation but not a major government apocalypse. When considering Treasury ETF investments, you should consider your time frame. Short-term Treasury trends have been making headlines since an enormous influx in 2008 put 30-year Treasury bonds below 3%.