Deflation Warning? – Investors Dumping TIPS ETFs

October 9th at 1:40pm by John Spence

ETFs indexed to Treasury Inflation Protected Securities surged to all-time highs in the wake of the Federal Reserve’s QE3 announcement. However, investors are unloading TIPS ETFs, which suggests they are locking in profits or see deflation as a greater threat than inflation.

Additionally, the recent outflows could mean investors are nervous that TIPS could be hurt if interest rates rise.

Over the past week, investors have pulled $548.8 million from iShares Barclays TIPS Bond Fund (NYSEArca: TIP), which holds $22.7 billion in assets. TIP has experienced the second-highest outflows for any ETF during the period, according to IndexUniverse flow data.

Additionally, PIMCO 15+ Year U.S. TIPS (NYSEArca: LTPZ) has seen $247.7 million move out the door the last week, good for fifth on the outflow list.

TIPS have been solid performers in the wake of the financial crisis due to falling Treasury yields and expectations the Fed’s QE purchases will stoke inflation.

The iShares Barclays TIPS Bond Fund has a five-year annualized return of 8.1%, compared with 0.9% for SPDR S&P 500 (NYSEArca: SPY), according to Morningstar.

TIPS are influenced by changes in inflation expectations as well as Treasury yields. [TIPS ETF Rises to All-Time High on QE3]

Vanguard warns investors need to remember TIPS possess interest rate risk. “Given today’s low or even negative real yields and relatively high interest rate sensitivity, TIPS investors face risks that should be carefully evaluated,” it says.

So, TIPS ETFs can be hurt by rising Treasury yields. “Like conventional Treasury bonds, TIPS can decline in value over any short-term period. In other words, investors should not view a TIPS portfolio as a risk-free inflation hedge,” according to Vanguard. [TIPS ETFs: Inflation Protection Still Has Risks]

The iShares Barclays TIPS Bond Fund actually has a negative 30-day SEC yield of -0.83%, according to manager BlackRock.

The demand for TIPS has been so strong this year that investors have bought 5-year bonds even though they had negative yields. [TIPS ETFs Rise After Bonds Sell at Record Negative Yield]

iShares Barclays TIPS Bond Fund

Full disclosure: Tom Lydon’s clients own TIP and SPY.

The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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