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.
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.
“The cyclical low for inflation rates has almost certainly past,” Peter Jolly, the global head of markets research at National Australia Bank Ltd., told Bloomberg, predicting headline consumer-price gains in the U.S. will rise above 3 percent early next year if oil prices remain at current levels. “That will help change market perceptions of inflation ahead, and put to rest deflation fears for now.”
For more information on Treasury Inflation Protected Securities, visit our TIPS category.
iShares TIPS Bond ETF