When calculating inflation, central banks have always relied on the consumer prices indices. These are based on baskets of goods containing the most important consumer items for private households. Food, housing, energy, healthcare and transport are sectors enjoying a relatively high weighting. There has been little change in these goods and services in the recent past. Indeed, annual inflation in Switzerland has been in negative territory for three of the last six years. Even in Switzerland, though, there has been and continues to be upward pressure on prices. This is being felt outside private consumer spending, especially in investments in tangible assets and securities. Nevertheless, what is known as asset price inflation does not attract particularly great attention either in monetary policy or in the public perception. "The price inflation of assets will continue to tighten," say the strategists at Swissquote. They base this assessment on the ultra-loose monetary policy. In the experts' view, the central banks will stick both with the quantitative loosening programs and with their zero interest rate policy. This is the only way they could free the economy from the grip of the coronavirus pandemic.
In line with this assessment and the concerns felt recently on stock markets about rising inflation, Swissquote has expanded its proprietary themes trading series. The Swissquote Inflation Index is now part of the large and successful ideas fund. The new benchmark offers the possibility of maintaining purchasing power systematically. To that end the index holds a diversified exposure to assets that correlate positively with inflation. "The spotlight is on commodities whose prices generally appreciate as inflation rises," the managers explain. The investment universe also includes inflation-protected US government bonds. Known in the trade as TIPS, these bonds utilise the consumer prices index to their advantage. "They represent one of the most direct opportunities to protect a portfolio from the effects of inflation," the Swissquote strategists argue. The asset class of volatility can also be employed, since it is regarded as an effective instrument for hedging risk. According to the experts, volatility is a particular advantage in the early phases of an acceleration in inflation.
To reflect this multilayered mix, other elements of the index include equities, exchange-traded funds (ETFs) and cash components. Each security must meet certain trading criteria, such as a daily stock market turnover of around CHF 100,000. Alongside the judgment of its own experts, Swissquote also falls back on a raft of quantitative calculations in the selection process. These include portfolio optimisation based on the mean value variance. The new underlying is generally reviewed and where necessary adjusted on a quarterly basis. However, the index sponsor can proceed to a quantitative optimisation or ad hoc rebalancing outside this interval as well. Possible triggers could be new listings or particular news reports.
The starting line-up of the Swissquote Inflation Index comprises 16 items, with commodities the dominant asset class (see graph). The iShares Diversified Commodity ETF alone makes up a good fifth. Coming in at just under USDbn 1.8, the fund replicates the Bloomberg Commodity Index and so encompasses the entire spectrum of goods. Inflation-protected US government bonds also have an important role. The Quadratic Interest Rate Volatility and Inflation Hedge ETF, launched in 2019, covers this bond class, as does the US TIPS ETF from Schwab. It goes without saying that equities, a sort of epicentre of the most recent asset price inflation, are another vital asset class. Here the index assumes that the rise in prices on Wall Street will continue. Two US benchmarks, the S&P 500 and Nasdaq 100, have made it through the initial selection process. By including the shares of several stock exchange operators, the managers are also taking into account the fact that the boom in equities ensures flourishing business for these companies.
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