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.
TIPS ETFs are 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.
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.
“Given its low interest-rate risk, this fund should continue to serve as a strong hedge against short-term inflation,” said Morningstar. The primary sources of the fund’s return are the inflation-indexed coupon payments. Its short duration minimizes price volatility. This fund could be a good option for an investor looking for an instrument that closely reflects immediate shifts in the CPI and inflation.
For more information on the fixed-income space, visit our bond ETFs category.