As inflation begins to pick up, fixed-income investors may be better off with Treasury inflation protected securities and related exchange traded funds.
TIPS are a good hedge against rising prices ahead. TIPS returns are affected by interest-rate risk as well as changes in the principal value when the Consumer Price Index moves. TIPS will adjust their principal value upward in response to a higher CPI, but the reverse occurs during periods of deflation.
“I like TIPS,” Gundlach, chief executive officer of DoubleLine Capital, said at a conference, according to Bloomberg. “TIPS are for winners.”
Pacific Investment Management Co. and Goldman Sachs Asset Management, among others, have also warmed up to TIPS and believe the asset could continue to outperform ahead. PIMCO has been recommending TIPS in a continuation of a long-standing view while Goldman Sachs said it was taking a long position on the securities on higher inflation expectations.
SEE MORE: Is it Time for Treasury Inflation Protected Securities ETFs?
The securities have returned 7.5% in 2016, compared with a 4.5% gain for nominal U.S. sovereign debt. Year-to-date, the iShares TIPS Bond ETF (NYSEArca: TIP) rose 7.2%, Schwab U.S. TIPS (NYSEArca: SCHP) gained 7.1% and SPDR Barclays TIPS ETF (NYSEArca: IPE) increased 7.6%.
[related_stories]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