Inflation-protected bonds offer a good way to hedge your portfolio against rising inflation. When denominated in a foreign currency, index-protected bonds also can cushion you from a falling U.S. dollar. Today, I will identify some funds that can protect your investment, even if interest rates climb.

Many bond holders know about U.S. government-issued Treasury Inflation Protected Securities (TIPS), which are designed to protect your money against inflation. If TIPS are unfamiliar to you, here is a brief explanation. The principal of TIPS increases with inflation, but decreases with deflation. Those inflation numbers are measured by the Consumer Price Index. When TIPS mature, you are paid the adjusted principal or original principal, whichever is greater. In addition, U.S. government TIPS pay interest twice a year, at a fixed rate.

Until recently, ETF investors have had access only to U.S. government TIPS. The SPDR Barclays Capital TIPS ETF (IPE) replicates an index, Barclays U.S. Government Inflation-Linked Bond Index, which includes TIPS with at least one year to maturity. Trading above its 50-day moving average, you may want to consider this ETF if you are seeking to invest in U.S. government TIPS.

In recent years, ETFs have launched that give you access to foreign government TIPS. The SPDR DB International Government Inflation-Protected Bond ETF (WIP), launched on March 13, 2008, is the oldest such ETF, seeking to replicate the DB Global Government ex-US Inflation-Linked Bond Capped Index. WIP currently is above its 50-day moving average, as the following chart shows. Its foreign bond holdings include securities from countries such as the United Kingdom, France, Japan, Turkey and Germany.

WIP recently gained a competitor. The iShares International Inflation-Linked Bond Fund (ITIP), launched on May 18, 2011, is intended to mirror the performance of the BofA Merrill Lynch Global ex-US Diversified Inflation-Linked Index. The fund had 39 holdings and an expense ratio of 0.40%, as of June 3. ITIP’s top-ten country allocations on that date included: France, 13.58%; United Kingdom, 13.58%; Brazil, 12.02%; Italy, 8.04%; Germany, 5.09%; Japan, 4.66%; Israel, 4.57%; South Africa, 4.55%; Sweden, 4.47%; and Mexico, 4.44%.

To be sure, there are good reasons to invest in overseas TIPS. For one, they reduce currency risk significantly. For another, investing in securities denominated in a foreign currency offers you protection specifically against a falling dollar.

However, you definitely want to consider the creditworthiness of the countries that compose a given ETF that tracks non-U.S. TIPS. Some countries, such as Greece, are struggling with mountainous debt and are vulnerable to default.

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