Consumer prices are slowly rising, and the markets are likely underestimating inflation expectations. Consequently, fixed-income exchange traded fund investors may want to consider Treasury bond inflation-protected securities to diversify against inflation ahead.

“Today’s inflation expectations are most likely too low,” according to Russ Koesterich, Global Chief Investment Strategist and Head of Model Portfolio & Solution Business at BlackRock. “Even in a world of slow growth, weak productivity and diminishing labor market slack, inflation may be higher than today’s diminished expectations suggest. Under this scenario, Treasury Inflation Protected Securities (TIPS) may represent a good long-term opportunity.”

U.S. core inflation, which excludes more volatile oil and food prices, increased 0.3% in January, the largest monthly gain since August 2011, after a 0.2% rise in December, according to Reuters. Core CPI also ran 2.2% in January year-over-year, the largest gain since June 2012 and exceeded the 1.0% average annualized increase for the past 10 years.

While higher inflation levels allow the Federal Reserve to implement a tighter monetary policy to reign in rising prices, any hikes would be a more hawkish stance than the market is currently discounting, Kosterich added.

Meanwhile, investors with a more long-term horizon can take a look at a number of TIPS-related ETFs to gain exposure to Treasury inflation-protected securities in anticipation of rising prices ahead. For instance, the iShares TIPS Bond ETF (NYSEArca: TIP) tracks a group of U.S. TIPS from the Barclays U.S. Treasury Inflation Protected Securities Index (Series-L). The ETF comes with an effective duration of 7.62 years and a 0.20% expense ratio.

The SPDR Barclays TIPS ETF (NYSEArca: IPE), which tracks the Barclays U.S. Government Inflation-Linked Bond Index, is a slightly cheaper alternative, with a 0.15% expense ratio and a lower 4.87 year duration. However, IPHE is less actively traded, showing an average daily volume of about 35,000 shares, according to Morningstar.

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