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.
That includes Treasury inflation protected securities-related ETFs, such as the iShares TIPS Bond ETF (NYSEArca: TIP), Schwab U.S. TIPS (NYSEArca: SCHP) and SPDR Barclays TIPS ETF (NYSEArca: IPE).
SEE MORE: TIPS ETFs May Be Better Alternative to Treasuries
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.
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“Investors’ appetites for an exchange-traded fund that provides exposure to bonds whose principal and coupon payments are adjusted for inflation have soared in recent sessions. Weekly inflows into the iShares Treasury Inflation Protected Securities Bond ETF (TIP) reached their highest level on record as investors brace for the possibility of a sustained upturn in price pressures,” reports Luke Kawa for Bloomberg.
[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.
Potential investors should also be aware that TIPS are generally more volatile than traditional nominal Treasuries due to the inflation adjustments to their principal value.
Still, investors continue piling into ETFs like TIP.
“Cumulative weekly inflows are more than $972 million, the highest of any U.S. fixed income ETF over this period. TIP has seen trading volumes north of 4.75 million and 6 million over the past two sessions, compared with a 15-session average of 1.7 million shares,” according to Bloomberg.
For more information on Treasury inflation protected securities, visit our TIPS category.
iShares TIPS Bond ETF
