Treasury Inflation-Protected Securities help investors hedge against the risks of diminished purchasing power although easy monetary policies by central banks have yet to stoke runaway inflation. If interest rates rise, investors would do better with global and short-term TIPS related exchange traded funds.
TIPS are a type of government issued Treasury security indexed to inflation. The par value would rise along with inflation, as measured by the Consumer Price Index.
The largest TIPS ETF, the iShares TIPS Bond ETF (NYSEArca: TIP), provides exposure to inflation protected Treasuries, but the fund only has 36 holdings and a 8.16 year duration. TIP has a 12-month yield of 1.94%. [Are Treasury ETFs Riskier than Stocks?]
Duration is a measure of risk associated with increases in interest rates – if interest rates rise, bonds with higher durations would take a larger hit.
Alternatively, David Fabian of Fabian Capital Management suggests investors should consider short-duration and global TIPS instead.
For instance, the PIMCO 1-5 Year U.S. TIPS ETF (NYSEArca: STPZ) or iShares 0-5 Year TIPS Bond ETF (NYSEArca: STIP) both come with low average durations, which makes them less sensitive to interest rate hikes. STPZ has a 2.28 year effective duration and an estimated yield to maturity of 0.56%. STIP has a 2.56 year duration and a average yield to maturity of 0.61%. Fabian warns that the income payments are erratic due to the coupon schedules of the underlying holdings.
The PIMCO Global Advantage Inflation-Linked Bond ETF (NYSEArca: ILB) is an actively managed bond fund that tracks inflation linked emerging market and developed economy bonds. Top regional allocations include U.S. 21%, Brazil 20%, Eurozone 14% and Mexico 12%. ILB has a 6.65 year effective duration and an estimated yield to maturity of 4.07%.
For more information on Treasury Inflation-Protected securities, visit our TIPS category.
Max Chen contributed to this article.
Full disclosure: Tom Lydon’s clients own TIP.