Treasury Inflation-Protected Securities (TIPS) are popular among fixed income investors looking to protect against the scourge of inflation and exchange traded funds make it easier to access TIPS.
While inflation expectations may remain muted now, investors are already looking into TIPS as a 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.
The FlexShares iBoxx 3-Year Target Duration TIPS Index Fund (NYSEArca: TDTT) is one of the more compelling options to consider among TIPS ETFs.
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.
TDTT “offers exposure to the Treasury Inflation-Protected Securities market while maintaining a three-year target duration for a reasonable fee. Its short and targeted duration provides a high correlation to immediate inflation changes and reduces unintended interest-rate risk. However, it has a lower yield than its peers, and there are comparable funds at lower costs,” said Morningstar in a recent note.