When it comes to hedging for inflation, most target date fund managers, 96% according to a recent Cerulli report, use Treasury inflation-protected securities.
However, as effective as TIPS are "at hedging against sharp, unexpected increases in inflation, they provide a relatively expensive inflation hedge and currently have negative real expected returns," according to the report.
Only 32% of TDF fund managers use commodities to hedge inflation, 13% use natural resources, 9% infrastructure and 8% non-U.S. inflation-linked securities, the report found.
One issue with these choices, states the report, is TIPS and commodities "have historically generated much lower returns than public equities and more mainstream fixed-income investments (e.g., corporate bonds, non-inflation-linked Treasuries), particularly during periods of relatively low, stable inflation," it states.
One example: from 2011 to 2020, the S&P Goldman Sachs Commodity Index generated a negative annual return in five out of nine years. However, in times of rising inflation, it does much better. In fact, the index returned 40.4% in 2021 and 11.6% in January 2022.
In January, David Blanchett, managing director and head of retirement research at PGIM DC Solutions, found only about 35% of plans offered a TIPS fund, with the same percentage offering real estate. In other words, he said, "while TDFs have exposure to these asset classes (and should, especially the more retirement-focused vintages), DIY participants aren't likely to have the same opportunity."
