TIPS ETFs Outperform Treasuries as Inflation Outpaces Yield

ETFs that invest in Treasury Inflation Protected Securities outperformed funds tracking nominal Treasuries of similar durations in 2012 as yields fail to keep pace with consumer prices. Inflation isn’t on fire but the annual rate is still higher than the paltry yields being paid by Treasury bonds.

For example, iShares Barclays Treasury Inflation Protected Securities Bond Fund (NYSEArca: TIP) rose to a record high earlier this month. [TIPS ETF Hits All-Time High as Inflation Trumps Treasury Bonds]

The TIPS fund has posted a total return of 6.9% year to date. The $22.4 billion fund has a weighted average maturity of about 9 years, according to sponsor BlackRock (NYSE: BLK).

The iShares Barclays 7-10 Year Treasury Index Fund (NYSEArca: IEF) is up 3.7% this year, according to Morningstar.

“Investors in Treasury securities will have to get used to yields lower than the U.S. inflation rate,” Bloomberg News reports, adding the so-called real yield on 10-year notes is less than zero for the second consecutive year.

This hasn’t happened since the 1970s. Real yields are determined by comparing the one-year percentage change in the Consumer Price Index with the 10-year Treasury note yield.