TIPS ETFs To Buy On Growing Inflation

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Inflation has been picking up steadily in the United States as evident from the latest data provided by the Labor Department, which showed that inflation accelerated at the fastest pace in five months. The consumer price index (CPI) rose 0.3% last month, marking the fastest pace of increase in five months, following the 0.2% rise in December. This brings the annual inflation to 1.4%.

The trend is likely to continue in the coming months given excessive cheap money flows, widening reach of vaccinations and a healing job market that have spurred the expectation for speedy recovery, which in turn will lift inflation. Economists in Wall Street Journal survey reveals that the U.S. economy will grow 4.3% this year, as the country exits the worst of the coronavirus pandemic. This marks a sharp increase from the 3.7% growth forecast for 2021 in last month’s survey. Goldman Sachs also raised its forecast for 2021 US GDP growth to 6.8% from 6.6%.

Additionally, markets across the world — from U.S. and European bonds to stocks and oil — are sending a clear signal that inflation is finally coming back. Per Bloomberg, the market-implied pace of U.S. consumer-price increases briefly accelerated to the fastest since 2014, and 30-year Treasury yields temporarily topped 2% for the first time in a year as rising expectations for an economic recovery fueled an oil rally. In Europe, a swap-market gauge of future inflation is close to its highest level since 2019.

The bond-market inflation gauge has climbed in nine of the past 10 months from the low of less than 0.5% seen last March, when the pandemic-related turmoil rocked markets. Further, oil price surged to a one-year high amid tightening global supply and an improving outlook for demand that has given a further boost to inflation expectations.

Meanwhile, the 10-year U.S. breakeven inflation rate, a proxy for annual inflation expectations, has strongly rebounded from the pandemic lows reached in March 2020 to 2.22%. The 5-year breakeven inflation rate, a Treasury market metric of inflation expectations, also surged to 2.3% — the highest level since April 2013. This means market experts expect inflation to average 2.3% over the next five years.

The inflationary expectations have led investors’ flocking to Treasury Inflation Protected Securities (TIPS) ETFs.


TIPS ETFs offer shelter against rising inflation. It not only combats increasing prices but also protects income for the long term. To explain in details, 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 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.

While there are several options in the space to tap rising consumer prices, we have highlighted the five most-popular ETFs that could be compelling investments:

iShares TIPS Bond ETF (TIP - Free Report)

This ETF is the most-popular choice in the TIPS space with AUM of $27.3 billion and average daily volume of 2.5 million shares. It tracks the Bloomberg Barclays U.S. Treasury Inflation Protected Securities (TIPS) Index (Series-L), holding 54 securities in its basket. The fund has an effective duration of 7.57 years and an average maturity of 8.10 years. It charges 19 bps in fees per year.

Schwab U.S. TIPS ETF (SCHP - Free Report)

This fund tracks the Bloomberg Barclays US Treasury Inflation-Linked Bond Index (Series-L), holding 50 securities in its basket. It has effective duration of 7.6 years and an average maturity of 8.1 years. SCHP is among the cheapest option in the TIPS space, charging just 5 bps in annual fees. It has AUM to $14.7 billion and trades in solid volume of 1.3 million shares a day.

Vanguard Short-Term Inflation-Protected Securities ETF (VTIP - Free Report)

With AUM of $10.9 billion, this ETF offers exposure to TIPS that have remaining maturity of less than five years by tracking the Bloomberg Barclays U.S. TIPS 0-5 Year Index. Holding 21 securities in its basket, it has an average duration of 2.5 years and an average maturity of 2.6 years. The product trades in an average daily volume of 1.2 million shares and charges 5 bps in annual fees.

iShares 0-5 Year TIPS Bond ETF (STIP - Free Report)

This fund offers exposure to short-term TIPS with effective duration of 2.75 years and an average maturity of 2.77 years. It holds 21 securities in its basket and follows the Bloomberg Barclays U.S. TIPS 0-5 Years Index (Series-L). STIP has amassed $3.5 billion in its asset base and has 0.05% in expense ratio. It trades in an average daily volume of 332,000 shares.

SPDR Portfolio TIPS ETF (SPIP - Free Report)

With AUM of $2.4 billion, this fund follows the Bloomberg Barclays U.S. Government Inflation-linked Bond Index and holds 51 securities in its basket. Average maturity comes in at 8.85 years while the adjusted duration is 8.50 years. The fund charges 12 bps in annual fees and trades in a good volume of 667,000 shares a day.

Disclosure: contains statements and statistics that have been obtained from sources believed to be reliable but are not guaranteed as to accuracy or completeness. References to any ...

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