A Fund for Inflation Protecton

NEW YORK ( TheStreet) -- In 2008, investors were looking for a holy grail of equity investing with absolute return vehicles as huge declines in the stock market created widespread fear. One theme in 2013 thus far has been the widespread acceptance that interest rates will rise at some point, and as June of this year showed, when this does happen, many segments of the fixed-income market will get hit very hard.

Now that equities have been doing well for the last few years, the holy grail investors are looking for is a fixed-income product with a decent payout that won't get crushed when interest rates finally return to more normal levels.

There are some prospects including the iShares Floating Rate Bond ETF ( FLOT) or the BulletShares line of corporate bond funds from Guggenheim which allow investors to choose a fund with a specific maturity date. Loading up on just two or three segments of the fixed-income market going into what might be an unprecedented time for bonds could expose the portfolio to risk that's difficult to gauge.

This possibility creates the need for investors to explore unfamiliar parts of the bond market for funds that could help weather a bond market storm.

The ProShares 30 Year TiPS/TSHY Spread ETF ( RINF) is a long short fund tracking an index that buys long-dated Treasury inflation-protected securities and sells long-dated U.S. Treasury bonds to capture break-even inflation.

The big idea is that if market expectations for inflation as measured by the TIPS/Treasury spread increase, then RINF will go up in price, and if inflation expectations decrease, then the price of RINF will go down. More specifically, the spread in yields between TIPS and regular Treasury bonds is viewed as a barometer for future inflation. When the spread between the two gets wider, then inflation is expected to increase, and when the spread gets narrower, inflation is expected to decrease.

RINF doesn't actually buy TIPS and sell Treasury bonds; it uses swaps to create the exposure. Although there are no interest payments from any of the holdings, cash in the fund can earn interest and RINF has paid some dividends. In the future, if interest rates go up, then RINF could increase its dividends. RINF's trailing yield is 0.72%, but any future payouts could be different.

The RINF fact sheet at the ProShares Web site shows the index tracked by the fund has a much lower historical volatility than indexes tracking TIPS and Treasury bonds. However, since RINF started trading in early 2012, it has been much more volatile than the iShares TIPS Bond ETF ( TIP) and just as volatile as the iShares 20+ Year Treasury Bond ETF ( TLT).

Higher inflation as a result of years of zero percent interest rates and asset purchases is a reasonable outcome even if the timing is unknowable. If inflation does start to rise, then that should be reflected in the spread tracked by RINF and the fund should go up. Additionally, inflation tends to put upward pressure on interest rates which could boost RINF's dividend payment.

There are a lot of variables, but if the fund does what it is intended to do, then it could turn out to be a good holding that avoids interest rate risk; to the contrary, it should benefit from rising rates.

This is a very complicated product and won't be suitable for most investors because of the complexity. While investors shouldn't invest in products that are difficult to understand, there is no reason not to explore alternative funds to see if they can be part of the solution. There is no harm in studying an investment product and deciding no.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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