ETF Spotlight on Pimco 1-5 Year U.S. TIPS Index Fund (NYSEArca: STPZ), part of an ongoing series.
Assets: $1.23 billion
Objective: The 1-5 Year U.S. TIPS Index Fund tries to reflect the returns of the shorter maturity subset of the Treasury Inflation-Protected Securities (TIPS) market.
Holdings: Short-term maturity TIPS, with maturities that range between 1 to 5 years.
What You Should Know:
- Bond giant PIMCO is the fund provider.
- STPZ has an expense ratio of 0.20%.
- The fund is down 0.20% over the past month, but it has gained 0.77% over the last three months and increased 4.89% year-to-date.
- TIPS offer returns that are linked to the monthly changes in inflation, which is measured by the Consumer Price Index.
- The STPZ ETF implements a laddered structure, which produces an average TIPS maturity of one to two years.
- “STPZ bonds’ principal is linked to changes in the Consumer Price Index and provides an effective hedge against inflation in an investor’s portfolio relative to standard Treasury bonds,” according to Morningstar analyst Timothy Strauts. “As the CPI rises, the principal in the individual TIPS bonds is adjusted upwards. The coupon on the bond is then paid on the higher principal, which raises the overall effective yield of the security.”
- Consequently, the inflation rate has to be above the “inflation break-even” rate for the TIPS bonds to be profitable.
- Morningstar analysts advise investors to purchase TIPS when inflation is low to lock in the investment at low or reasonable cheap prices. Historically, anytime the break-even rate has fallen below the average of 2.5% to 3.0%, an investor is better off with a TIPS bond instead of Treasuries.
The Latest News:
- Markets will get data on U.S. inflation later this week with the Producer Price Index crossing Wednesday followed by the Consumer Price Index the next day.
- Yields on inflation-linked bonds dropped below sovereign debt by the most in three years, report Liz Capo McCormic and Daniel Kruger for BusinessWeek.
- “The inflation-linked debt market is confirming signals from pretty much all other capital markets about concerns over the outlook for European and U.S. economic growth,” Jack Malvey, chief global markets strategist at Bank of New York Mellon Corp., commented. “The concerns which the market generally shared over the first half of 2011 about the potential resurrection of inflation in so-called advanced economies have subsided.”
- The 10-year break-even rate between yields on U.S. government notes and TIPS was 0.69% below the last peak at the end of last week.
- The IMF estimates developed nation inflation would increase 2.6% this year and 1.7% for 2012.
- The Fed’s measure of traders’ inflation expectations dropped to 2.61% from 3.23% at the start of August.
- “The bond markets’ focus has shifted from concerns about inflation to concerns about economic growth,” Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd. in Edinburgh, remarked. “Both the U.S. and Euro-land economies are potentially as risk of going into recession.”
For past stories in this series, visit our ETF Spotlight category.
PIMCO 1-5 Year U.S. TIPS Index Fund
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.