Although some departures from fixed income exchange traded funds have recently been spotted as investors reconcile the notion of the Federal Reserve raising interest rates in December, some corners of the bond market remain investor favorites.
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.
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.
Changes in inflation expectations can cause increased trading activity as investors adjust to a new break-even rate – the yield difference between nominal Treasury bonds and TIPS of the same maturity, and cause swings in TIP prices.