The inflation rate climbed to 7% during December 2021, highlighting the need for fixed income investors to get exposure to short duration and Treasury inflation-protected securities (TIPS).
Investors are realizing this, and the flow of money into TIPS funds tells the story. 2020 saw a strong year for TIPS inflows followed by an even better year in 2021.
“Negative yields notwithstanding, money lately has been rushing into TIPS funds and ETFs,” the New York Times reports. “In 2020, net new flows of about $22 billion gushed into them, according to Morningstar. In just the first 10 months of 2021, those flows nearly tripled, to $61 billion.”
“Performance may have been the draw: The average TIPS fund tracked by Morningstar returned 5.5 percent in 2021, compared with a loss of 1.5 percent for the Bloomberg Barclays Aggregate Bond Index, a well-known bond index,” the report adds further.
Shortened Duration and Inflation Protection
Getting exposure to shorter duration date and bonds with inflation protection is available with a pair of funds from FlexShares. Both ETFs feature low expense ratios of 0.18%.
First up, there’s the FlexShares iBoxx 3-Year Target Duration TIPS Index Fund (TDTT). TDTT seeks to provide investment results that, before fees and expenses, correspond generally to the price and yield performance of the iBoxx 3-Year Target Duration TIPS Index, which reflects the performance of a selection of TIPS with a targeted average modified adjusted duration, as defined by the index provider, of approximately three years.
“TDTT can be useful as a tool for protecting portfolios against anticipated upticks in inflationary pressures,” an ETF Database analysis explains. “TDTT could be used, in moderate amounts, by buy-and-hold investors, or as a tactical play for those looking to shift into low-risk assets that may hold up well in inflationary environments.”
For investors looking to get more yield while taking on more rate risk, another option is the FlexShares iBoxx 5-Year Target Duration TIPS Index Fund (TDTF). The fund seeks to provide investment results that correspond generally to the price and yield performance of the iBoxx 5-Year Target Duration TIPS Index.
“TDTF generally won’t deliver much in the way of current returns, given that it features securities that are relatively close to maturity and that exhibit minimal credit risk; it is more appropriate as a ‘risk off’ tool for those anticipating chaos in the markets,” an ETF Database analysis says.
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