Some fixed income exchange traded funds can help investors balance bond portfolios when inflation ticks higher. A solid idea from that group is the ProShares Inflation Expectations ETF (NYSEArca: RINF). RINF, which turns seven years old in January, tracks the FTSE 30-Year TIPS (Treasury Rate-Hedged) Index.
RINF is “designed to provide exposure to 30-year breakeven inflation (a widely followed measure of inflation expectations),” according to Maryland-based ProShares. “The fund’s index is designed to be sensitive to changes in breakeven inflation. It is not designed to reflect CPI or other measures of realized inflation.”
TIPS are a type of Treasury security that 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. TIPS also offer investors another layer of diversification as many aggregate bond funds exclude TIPS from their holdings.
Data suggest RINF’s performance has recently been impressive among high-grade U.S. government bond ETFs.
“The one-year return is 9.3 percent and its annualized three-year track record is up 2.1 percent. It’s down 2.9 percent on a five-year basis,” reports Financial Advisor. “The 12-month yield is 2.96 percent and its expense ratio is 30 basis points. RINF has $11.7 million in assets under management.”
The Strategy Behind ‘RINF’
While RINF’s net modified duration is -0.16 years, the fund’s income profile remains solid with a 30-day SEC yield of 2.20%.
Investors will typically look at TIPS ahead of an inflationary period since buying TIPS after inflation has gone up means that the security has already priced in the inflation and investors would likely be overpaying for the TIPS exposure.
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The breakeven inflation indicator is used to quantify inflation expectations. Specifically, it is the spread difference in yields between normal Treasuries and Treasury Inflation-Protected Securities, or TIPs, of similar duration. By taking the spread differential, investors may determine how much influence inflation has on Treasury yields.
“RINF gives buyers a way to profit from increases in the market’s expectation of inflation. To do so, the fund buys 30-year TIPS and sells a similar amount of duration-adjusted U.S. Treasury bond positions (mostly futures and swaps), attempting to achieve an overall effective duration of zero. The fund is rebalanced monthly,” according to Financial Advisor.
For more information on the fixed-income market, visit our bond ETFs category.