Fixed income exchange traded funds were scorching hot in the first quarter and most of investors’ adulation for bond funds was focused on ETFs holding U.S. government debt. That affection has been intensifying for ETFs holding Treasury inflation protection securities (TIPS).
If the yield curve steepens, every fixed-income asset will see higher rates but longer dated bonds will see yields rise the most, suggesting that the economy is quickly heating up. That would make ETFs like TIP more attractive to fixed income investors.
Last year’s sudden plunge in oil prices has helped keep prices low, but the Fed believes the drop in oil prices will only be short-term. However, the stronger dollar is a dominant factor in keeping commodity prices depressed. The iShares TIPS Bond ETF (NYSEArca: TIP) is a popular avenue for investors looking for TIPS exposure.
Part of the reasons advisors and investors are embracing TIPS and the relevant ETFs are bets that markets are not pricing in high enough inflation.
[related_stories]“The prices of TIPS–which grow in value alongside inflation–have picked up amid signs the Fed won’t act immediately to tamp down price pressures that have picked up in recent months. In February, an index of consumer prices, minus food and energy, rose 2.3% from a year ago, marking a continued uptrend in inflation,” reports Ben Eisen for the Wall Street Journal.
If the Fed raises rates too quickly, it could raise deflationary pressures, which could send the economy into a spiraling decline as cash becomes more valuable, prices continue to fall and Americans withhold spending to buy something cheaper tomorrow. [ETFs for a Deflationary Period]
The Fed is targeting an inflation rate of about 2%. Additionally, looking at the Fed’s preferred inflation gauge, the Commerce Department’s consumption expenditure price index, inflation has undershot 2% for over two-and-a-half years.
“In a record quarter investors have piled $2.14 billion into ETFs such as the iShares TIPS Bond ETF. Investors holding TIPS have been well rewarded this year. According to Markit’s iBoxx indices, TIPS have returned 4.2 percent so far this year, outperforming their more liquid non-inflation linked counterparts, treasuries,” said Markit in a research note.
iShares TIPS Bond ETF
