Fixed-income investors piled into Treasury inflation protected securities-related exchange traded funds as a way to hedge against the negative effects of rising prices on their bond portfolios.
U.S. mutual funds and ETFs that track TIPS attracted $6.2 billion in new inflows this year, heading toward the largest calendar-year inflow since 2011, the Wall Street Journal reports. TIPS-related funds added $384.5 million for the week through Wednesday and experienced net inflows nine of the last 10 weeks.
“The bigger picture is that central banks around the world are actively trying to push inflation higher, so why not fight on the same side as the player with an unlimited balance sheet,” Donald Ellenberger, head of multisector strategies at Federated Investors, told the WSJ.
Recent government data revealed core inflation, which excludes food and energy, hit a two-year high of 1.7% in the third quarter, according to the Wall Street Journal. The Federal Reserve has a 2% inflation target.
“Tips were a forgotten asset type for the last few years because investors thought inflation was gone forever,” Nicholas Colas, chief market strategist at Convergex, told the Financial Times. “They’re back now as markets start to think the Federal Reserve may want to pressurize the economy with a period of above-average inflation.”
SEE MORE: TIPS ETFs May Be Better Alternative to Treasuries
With inflation expectations rising, ETF investors have turned to TIPS options. Treasury inflation-protected securities, or TIPS, are a type of Treasury security that is indexed to inflation as a way to shield investors from the negative effects of inflation. The securities’ par value rises with inflation as measured by the Consumer Price Index while interest rate remains fixed. TIPS also offer investors another layer of diversification as many aggregate bond funds exclude TIPS from their holdings.
[related_stories]Investors will typically look at TIPS ahead of an inflationary period since buying TIPS after inflation has gone up means that the security has already priced in the inflation and investors would likely be overpaying for the TIPS exposure.
ETF investors can gain exposure to Treasury inflation protected securities through a number of options, including the iShares TIPS Bond ETF (NYSEArca: TIP), Schwab U.S. TIPS (NYSEArca: SCHP) and SPDR Barclays TIPS ETF (NYSEArca: IPE).
For more information on Treasury inflation protected securities, visit our TIPS category.
iShares TIPS Bond ETF