It seems like everyone and their brother is anticipating inflation, but their reactionary moves are coming in a little early. What many may not realize is that TIPS exchange traded funds (ETFs) don’t do as well in non-inflationary environments.
TIPS – or Treasury Inflation-Protected Securities – have gained 17% over the last two years. Now some traders are saying that TIPS ETFs could lose value as consumer prices don’t rise fast enough to justify the gains, says Investment News. [TIPs ETFs: A Surge in the Making.]
Yields on 10-year TIPS show that investors expect the consumer price index to increase an average of 2.18% a year. The problem? The CPI went up just 1.5% in 2010, and this year it’s forecast to rise 1.7%. [It Might Be Time for TIPS ETFs.]
The problem with owning TIPS when little or no inflation exists is that you could get stuck with a lower yield. If deflation becomes a factor, it cuts into your yield.
It’s been suggested that investors approach TIPS strategically, instead of a buy-and-hold-forever opportunity, because tactically trading them could shortchange investors of the rewards they offer. That’s because inflation is a noisy measure in the short-term because it’s a monthly number; the long-term trends should be viewed to see where the overall trajectory is going.
When inflation does rear its ugly head, you’ll have a wide range of TIPS funds to play it, including iShares Barclays TIPS (NYSEArca: TIP), PIMCO 1-5 Year U.S. TIPS (NYSEArca: STPZ) and Schwab U.S. TIPS (NYSEArca: SCHP).
Tisha Guerrero contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, 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.