Fixed income investors typically embrace Treasury Inflation Protected Securities (TIPS) and the corresponding exchange traded funds due to fears of rising prices. On that note, those investors can protect their portfolios against inflation with minimal fees with the Schwab U.S. TIPS ETF (NYSEArca: SCHP).
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.
The “break-even rates” – a gauge of expected inflation derived from cparing the yields of conventional Treasuries against TIPS – widened this month and increased in the wake of last week’s Fed meeting. The 10-year break-even rate rose to 1.62% last week, its highest since December, while the five-year rate rose to 1.52%, its highest since last summer.
The widening break-even rates suggest that investors are anticipating increased inflation. Core US inflation has exceeded analyst estimates, climbing to an annual rate of 2.3% in February.
SCHP is the cheapest option in the category, with a 0.07% expense ratio, and comes with a 7.7 year effective duration. TIPS returns are affected by interest-rate risk like other debt securities, but the inflation-protection aspect allows TIPS to fluctuate their principal value when the Consumer Price Index is adjusted.
[related_stories]“SCHP offers investors a good mix of security and inflation protection. I think this ETF is best viewed as a position to hold long term. However, it can also be used for short term speculation on whether or not the CPI will hit or exceed its targets when the numbers come out. If you are worried that hyper-inflation will be the long term result of the Fed’s dovish policy a security like SCHP will let you rest easier, for this purpose it can be seen as an alternative to gold,” according to a Seeking Alpha analysis of SCHP.
For added cost savings, Schwab clients can trade SCHP on a commission-free basis on the firm’s ETF OneSource platform.
“If economic conditions slow down in the near future, something which is very possible, an investor who is long on an ETF like SCHP could find themselves facing deflation. Deflation is something that would be disastrous for this securities performance and should be kept in mind as a significant risk factor,” adds Seeking Alpha.
Schwab U.S. TIPS ETF
