TIPS ETFs To Bet On Higher Inflation

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Inflation is currently the biggest headache for investors as U.S. consumer prices have accelerated at the fastest rate in May since 1981. Record gasoline prices and geopolitical factors are the two main culprits pushing inflation higher.

The consumer price index jumped 8.6% year over year to a fresh 40-year high, from an 8.3% annual increase recorded in April. Amid the inflationary backdrop, investing in TIPS ETFs, which offer shelter against rising inflation, would be prudent. There are several options in the space to tap rising consumer prices.

Among them, iShares TIPS Bond ETF (TIP - Free Report), Schwab U.S. TIPS ETF (SCHP - Free Report), Vanguard Short-Term Inflation-Protected Securities ETF (VTIP - Free Report), iShares 0-5 Year TIPS Bond ETF (STIP - Free Report) and Quadratic Interest Rate Volatility and Inflation Hedge ETF (IVOL - Free Report) are the five most popular that could be compelling investments.


TIPS are government bonds whose face value rises with inflation. TIPS ETFs not only combat increasing prices but also protect income for the long term. To explain in detail, consider a fixed interest rate of 2.0% on five-year TIPS with an initial face value of $1,000. In the first six months, when inflation is zero, the semi-annual interest payment would be $10 but when inflation rises 5% annually in the next six months, the semi-annual interest rate would be $10.25 (1,025*2%-1/2 = 10.25).

This is because TIPS pays interest on an inflated-principal amount (principal rises with inflation) and, in this case, the principal becomes $1,025 when the semi-annual inflation is accounted for. As a result, both principal amount and interest payments will go on rising with increasing consumer prices.

Below we have highlighted the details of five ETFs:


iShares TIPS Bond ETF is the most popular choice in the TIPS space with AUM of $30 billion and an average daily volume of 5 million shares. TIP tracks the Bloomberg Barclays U.S. Treasury Inflation Protected Securities (TIPS) Index (Series-L), holding 49 securities in its basket. The fund has an effective duration of 7.04 years and an average maturity of 7.53 years. It charges 19 bps in fees per year.


Schwab U.S. TIPS ETF tracks the Bloomberg Barclays US Treasury Inflation-Linked Bond Index (Series-L), holding 48 securities in its basket. It has an effective duration of 7.50 years and an average maturity of 8.00 years. SCHP is among the cheapest options in the TIPS space, charging just 5 bps in annual fees. The fund has AUM of $15.4 billion and trades in a solid volume of 6.2 million shares a day.


With AUM of $21.1 billion, Vanguard Short-Term Inflation-Protected Securities ETF offers exposure to TIPS with a maturity of less than five years by tracking the Bloomberg Barclays U.S. TIPS 0-5 Year Index. Holding 21 securities in its basket, VTIP has an average duration of 2.5 years and an average maturity of 2.6 years. The fund trades in an average daily volume of 4 million shares and charges 4 bps in annual fees.


iShares 0-5 Year TIPS Bond ETF offers exposure to short-term TIPS with an effective duration of 2.46 years and an average maturity of 2.51 years. The fund holds 18 securities in its basket and follows the Bloomberg Barclays U.S. TIPS 0-5 Years Index (Series-L). STIP has amassed $12.5 billion in its asset base and has 0.03% in expense ratio. It trades in an average daily volume of 1.6 million shares.


Quadratic Interest Rate Volatility and Inflation Hedge ETF is a first-of-its-kind fixed-income fund that seeks to profit from relative interest rate movements through Fed rate cuts or rising long-term interest rates. The fund seeks to profit from market stress when fixed-income volatility increases while providing the potential for enhanced, inflation-protected income. IVOL has AUM of $1.6 billion and charges 1.05% in annual fees. It trades in 541,000 shares a day on average.

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