TIPS ETF Watching Economy and Inflation Closely

The threat of inflation is looming, as November’s consumer price index increased the most in two years, which has increased the demand for inflation hedges, including exchange traded funds (ETFs). Increased demand has lifted the Treasury Inflation Protected Securities (TIPS) prices this year because as their name suggests, TIPS rise with inflation, reports Donald J. Korn for Investor’s Business Daily.

Korn reports that TIPS have topped all fixed-income categories so far this year. With the Federal Reserve lowering interest rates, more money is available to chase fewer goods. This helps the TIPS investors. But an economy slowing too fast could lower the expectations of inflation, thus hurting TIPS. iShares Lehman TIPs Bond (TIP) is up 5.6% year-to-date, compared to losing 3.9% in 2006.

For full disclosure, some of Tom Lydon’s clients own TIP.