With the economy moving full steam ahead after a pandemic-ridden 2020, fears of inflation keep ticking upward. A better-than-expected earnings showing in the first quarter of 2021 could cause yields and inflation to rise, adding to the case for the iShares TIPS Bond ETF (TIP).
TIP seeks to track the investment results of Bloomberg Barclays U.S. Treasury Inflation Protected Securities (TIPS) Index (Series-L), which is composed of inflation-protected U.S. Treasury bonds. The fund generally invests at least 90% of its assets in the bonds of the underlying index and at least 95% of its assets in U.S. government bonds.
It may invest up to 10% of its assets in U.S. government bonds not included in the underlying index, but which BFA believes will help the fund track the underlying index. It also may invest up to 5% of its assets in repurchase agreements collateralized by U.S. government obligations and in cash and cash equivalents.
TIP gives investors:
- Exposure to U.S. TIPS, which are government bonds whose face value rises with inflation
- Access to the domestic TIPS market in a single fund
- Protection against intermediate-term inflation
- A low expense ratio of 0.19%
The Opportune Time for ‘TIP’?
A rough ride could be ahead for equities as earnings results are around the corner. As mentioned, better-than-expected earnings could continue to spark inflation fears and thus substantiate the case for TIP as part of a fixed income investor’s portfolio.
“April means another earnings season is upon us, bringing the potential increase of choppiness to equities,” an Investing.com article noted. “Meanwhile, since the start of 2021, as fears regarding the pandemic have begun to subside slowly, higher inflation expectations have pushed the U.S. 10-year Treasury yield to 1.71 and beyond.”
“In the U.S., the official inflation level is measured by the Consumer Price Index, CPI. The Fed seems comfortable with the trend of rising inflation expectations,” the article added further. “We recently discussed inflation as well as U.S. Treasury inflation-protected securities (TIPS) as an appropriate asset for an inflationary world. TIPS are debt securities for which the coupon and principal payments are indexed to the CPI.”
An ETF like TIP can help investors hedge against a rising tide of rates and inflation without having to purchase individual hedging components.
“By indexing the cash flows of the bonds to an inflation index, TIPS play an essential role in hedging this economic risk,” the article added. “In addition, Treasury securities, including TIPS, are backed by the credit and full faith of the U.S. government.”
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