WTIP – WisdomTree Inflation Plus Fund –

I’ve never been fully sold on inflation-linked bonds.

Historically, traditional bonds have delivered real, positive returns over time. And that makes sense: if investors are going to lock in nominal yields for years, they should demand a decent risk premium for doing so.

So if regular bonds already compensate for inflation risk in the long run, why bother with TIPS? By design, once you strip out inflation uncertainty, you’re left with an asset class that should deliver lower expected returns. That’s just basic risk pricing.

Even worse, sometimes the market piles into TIPS so aggressively that investors end up locking in negative real returns:

Back when traditional bonds were offering negative nominal returns, you could at least hold onto the hope that inflation would fall even further. But TIPS? In those years, they guaranteed a loss. No hope. No upside. Just a slow, predictable bleed.

TIPS felt like an inefficient trade — to me. And yes, that qualifier matters.

I understand why TIPS exist. For pension funds, they’re an elegant solution: you match long-term liabilities with inflation-linked assets, and you keep the regulator happy. Giving up a few basis points of return is a fair price for that kind of stability (managers of the scheme are using company money, not theirs, so they can stomach this inefficiency – up to a certain point).

For retirees, or those close to it, TIPS can also make a lot of sense. Especially now. In the U.S., you can lock in over 2% real yields for the next 10+ years. That gets you surprisingly close to the 4% safe withdrawal rate, with less volatility and more predictability.

If you’re 65, you may not have time to wait for traditional bonds to bounce back after an inflation shock. And that’s assuming a mild inflation event, like we saw in 2022. If something closer to hyperinflation ever hits? Traditional bonds won’t recover in your lifetime.

TIPS to the rescue

TIPS might still be good because they come to the rescue when the portfolio needs it. Take 2022:

TIPS performed better than bonds, but the real juice seems to come from a specific product (VTIP) rather than a real overperformance of the underlying instrument. If we look at a longer horizon, TIPS appear to be even more volatile than bonds:

WisdomTree to the rescue?

WisdomTree took the classic quadrant analysis and levelled it up, adding a layer of capital efficiency that turns a good framework into a more powerful portfolio tool:

from here

They combined the Rising Inflation/Falling Growth elements (switching Convertibles with Bitcoin) into a capital-efficient ETF, providing a total exposure of $195 for a $100 investment. Here comes the WisdomTree Inflation Plus fund WTIP.

The ETF asset allocation is structured as follows:

Cash component: For every $100 invested, roughly $10 is kept in short-term collateral that earns returns comparable to U.S. Treasury bills.
TIPs exposure: For every $100 invested, roughly $85 is invested in a laddered portfolio of Treasury Inflation Protected Securities.
Bitcoin-related exposure: For every $100 invested, roughly $5 and up to $10 are invested in Bitcoin ETPs.
Commodity exposure: To help magnify the benefits of the asset allocation, roughly $95 in a diversified basket of commodity futures is layered on top for a total exposure of $195.

In particular, the commodity exposure is structured like this:

Using a trend signal to get commodity exposure is a solid idea. That’s exactly why I included COM in the Model Portfolio: long-only, buy&hold, commodities (aside from maybe gold) are usually a poorly designed bet.

But there’s a catch.

The issue here is who’s running the trend model. And WisdomTree doesn’t exactly have a stellar track record when it comes to building trend-following strategies:

WTMF is a trend fund that invests in all asset classes, not just commodities.

Hope is not a strategy, but maybe they learned from past mistakes?

1 + 1 = 0

I’ve written plenty on this blog about the challenges facing traditional bonds. Looking ahead, there are strong reasons to believe inflation could stay elevated, or even move higher. That means portfolios might need exposure from the “high inflation” quadrants.

So yes, I’d welcome an alternative to trend following in this space. Especially if it works.

WisdomTree’s move to build a capital-efficient solution here is a good one. Can they actually deliver on the trend-following promise? That’s still up for debate.

The good news is I can now track WTIP and see how it stacks up against other models like COM and HARD.

This isn’t WisdomTree’s first run at capital efficiency: their GDE ETF already overlays gold on top of equities. They could’ve easily gone the same route here: TIPS + gold, maybe even throw in some BTC. Instead, they opted for something more complex.

Let’s hope that’s because they believe in their trend engine, not just because they wanted to be different.

The rest of the universe

There are other ‘thematic’ ETFs out there that aim to offer inflation protection in creative ways.

HIDE, as High Inflation DEflation, is the trend following ETF from Alpha Architect. It trades only in Treasuries, REITs and commodities. To me, it feels like they leaned more into the marketing pitch than actual investor needs. Yes, the fees are low (great). But so is the volatility, and that’s a problem.

Low vol = low capital efficiency. If you’re trying to hedge inflation, you need something with actual bite, not a soft cushion.

On the other end of the spectrum, there’s PFIX from Simplify. Structurally, it’s like holding puts on 20-year Treasuries, but with smarter engineering to reduce the typical bleed. Since launch, performance has been solid. More importantly, the product has done what it said it would do.

The only catch? Simplify tends to launch either great products or total duds, no middle ground. So with PFIX, it’s hard to tell: is this real edge, or just great timing?

In a different market regime, would PFIX still hold up? Or is it only useful as a tactical trade? That’s the question investors need to answer before assuming it’s a forever hold.