ETF Trends’ CEO Tom Lydon discusses the iShares TIPS Bond ETF (TIP) on this week’s ETF of the Week podcast with Chuck Jaffe on the MoneyLife Show.
Lydon opens by describing the novelty of the inflationary environment that we are currently in with regards to ETFs and how inflation remains a key concern for advisors going into 2022. Add onto that the direction from the Fed on more aggressive tapering and interest rate increases in the second half of the year, and it all equates to a difficult time for the bond space looking forward.
Rising interest rates negatively impact bonds because new bonds that are opened with higher rates decrease the value of previous bonds at lower rates. This means that an investor who is holding a bond in their portfolio before interest rate increases would see that value diminish as rates rise, unless they plan on holding the bond to maturity. For retirees or those looking to retire soon, this becomes a big concern that TIP seeks to address.
“Here’s a product that’s pegged to inflation, and there is a Treasury Inflation-Protected security that is put out by the U.S. Treasury that tracks inflation, and you can actually buy it with the idea that it’s pegged to inflation,” Lydon explains.
TIPS-related funds have seen a huge boom this year, bringing in nearly $30 billion in new money as advisors and investors seek inflationary hedges. TIP in particular was above its 200-day moving average for much of the year, before dipping briefly with the Fed’s announcement of interest rate increases next year, and is back up once more.
Bonds in general are down, which can make it difficult for the typical asset allocation portfolio; the iShares Core U.S. Aggregate Bond ETF (AGG), the general ETF used to track the bond space, is currently down 4% YTD. For those investors with a 60/40 portfolio, the bond allocation segment has become increasingly more difficult to find performance for. Many investors are looking to alternatives, such as money market funds — there are currently $8 trillion in this fund type — or equities to try and find returns.
Options overlay ETFs have also risen to popularity as the bond space has faltered, with funds such as the JPMorgan Equity Premium Income ETF (JEPI) offering the potential of high yields as an alternative.
“The message is 2022 is going to be a challenging year for fixed income, and yes, you can follow trends, but more importantly, for people who have been accustomed to holding fixed income allocations for an extended period of time and getting some yields, although they have been declining, it’s been safe. It may not be that way anymore,” Lydon explains.
TIP is a fund that is great for advisors and investors who believe that inflation is going to be hanging around for the next year or two and negatively impact fixed income. It’s an ETF that gives access to the domestic TIPS market all in a singular fund and is up 5.11% YTD.
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