TIPS ETFs To Buy On Growing Inflation

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)

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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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