Popular ETFs for Inflation Protection

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) merits a place in the TIPS ETF conversation. TDTT debuted in September 2011 and has over $2 billion in assets under management. Data suggest TDTT is worth considering right now.

“Against a backdrop of U.S. tax reform, the declining U.S. dollar and higher commodity prices, TIPS breakeven spreads (BES) have been on the rise since mid-December, reversing the trend seen through most of 2017,” said FlexShares. “BES measure the difference in yield between similar maturity Treasury yields and the current yields on comparable TIPS.”

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. TDTT has 16 holdings and a modified adjusted duration of 3.09 years.