Fear this new fund type

As of last September, inflation, as measured by the Consumer Price Index, rose 3.9 percent from August 2010. That increase, along with today’s federal deficit and low interest rates, has fueled inflation fears.

Of course, at least 51 mutual funds invest in Treasury Inflation Protected Securities (TIPS), which have a rate of return that increases with inflation and decreases with deflation. (When a TIPS matures, you are paid the adjusted principal or your original principal, whichever is more.)

But now the mutual-fund industry has introduced hybrid exchange-traded funds (ETFs) that typically combine TIPS and other inflation-fighting investments that fare well when inflation rises, such as foreign currencies, oil, gold and real estate.

Taking the concept a bit further, ProShares asked Securities and Exchange Commission last September for permission to offer an inflation-fighting ETF that combines TIPS with a short position, or a bet that prices will fall, in 30-year Treasury bonds. (Normally, Treasury prices fall when inflation and interest rates rise; this is the first short Treasury fund that’s been held up as an anti-inflation fund.)

But are these new inflation-fighting ETFs everything that they’re cracked up to be? For the most part, no. They’re expensive. For example, IQ Real Return ETF charges 0.66 percent per year in expenses. Typical ETFs that invest in inflation-adjusted bonds charge about 0.19 percent per year in expenses.

Plus, ETFs are complex, difficult to understand and difficult to check for tracking error.