ETF Spotlight on iShares Lehman TIPS Bond (TIP), part of a recurring series.

Assets
$8.1 billion

Holdings
This fund holds of a mix of U.S. Treasury bonds and notes.

Objective
TIP, which began on Dec. 4, 2003, seeks to correspond to the performance of the price and yield of the inflation-protected sector of the U.S. Treasury market. The index includes all publicly issued U.S. Treasury inflation-protected securities with at least one year remaining to maturity, rated investment grade and have $250 million or more of outstanding face value.

The fund is most heavily weighted in maturities of 5-10 years (42.9%), followed by 1-5 years (27.8%) and 15-20 years (20.4%).

This fund has a yield that equals the average interest rate of the bonds in its underlying index, and generally the interest rates change in small degrees. TIP currently has a yield of 7.06%.

What’s Good
Treasuries are the perennial safe-haven investment, so in times of economic crisis, this fund stands to benefit from the rush. These securities are backed by the full faith and credit of the U.S. government – meaning that if the government goes bankrupt, you lose. However, the government has a wide range of ways to gain access to cash (for example, by raising taxes), and that makes bankruptcy extremely unlikely.

This fund gives investors a cost-effective way to get exposure to a range of bonds and different maturity dates. Before ETFs came along, getting exposure this wide would have been prohibitively expensive.

What To Watch Out For

• You will never get rich with Treasury bonds, as their yield is the lowest among all bond types. That’s the price investors pay for high quality. Short-term Treasuries have been yielding about 1% or less, while 10-year bonds about 3.6%.
• With TIP and other bond ETFs, the share price is determined by the face values of the individual bonds in the underlying index. When those prices rise, so does the share price of the ETF.

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

Tags: Bond ETFs, Sector ETFs, TIP, Treasury Bonds