In response to rising rate expectations and inflationary pressure, fixed-income investors are picking out short-term Treasury Inflation Protected Securities and related exchange traded funds.
Year-to-date, the FlexShares iBoxx 3-Year Target Duration TIPS Index Fund (NYSEArca: TDTT) is up 0.8%, PIMCO 1-5 Year U.S. TIPS ETF (NYSEArca: STPZ) is up 1.1% and Vanguard Short-Term Inflation-Protected Securities ETF (NYSEArca: VTIP) is up 0.9%. [Fight Back Against Inflation with TIPS ETFs]
The TIPS-related ETFs target the shorter end of the yield curve – bond funds with shorter durations are less sensitive to changes in interest rates. TDTT shows a modified adjusted duration of 3.09 years, STPZ has a 2.7 year effective duration and VTIP comes with a 2.0 year average duration.
TIPS securities also provide exposure to government Treasuries whose principal is adjusted to reflect changes in inflation.
The combined hedge against inflation and rising interest rates have helped these fixed-income ETFs attract large inflows. Over the past year, VTIP saw $414 million in new assets and TDTT added $368 million, the Wall Street Journal reports.
Inflation-protection strategies like the VTIP fund “generally do well when expectations for inflation are rising,” Todd Green, chief investment officer for Alesco Advisors, said in the article.
TIPS have been heavily backloaded, with recent long-term Treasury auctions allowing the Federal Reserve to pile on cheap, extended financing if inflation stays around 2%.