Even with the Fed keeping interest rates near zero, inflation worries continue to swirl in the capital markets, but ETFs like the Vanguard Short-Term Inflation-Protected Securities Index Fund ETF Shares (VTIP) can help ease investors’ fears.

The first half of 2021 was marred by volatility thanks to inflation fears as consumer prices continue to rise. Even as the global economy continues the healing process, inflation has been seen as an antagonizing factor that could slow recovery.

A recent CNBC article addressed those fears but also offered solutions (one area of the debt market where VTIP is beneficial): “There also are some bonds that are specifically designed to protect investors against rising prices. Those include Treasury inflation-protected securities or TIPS.”

VTIP seeks to track the Bloomberg Barclays U.S. Treasury Inflation-Protected Securities (TIPS) 0-5 Year Index performance. The index is a market-capitalization-weighted index that includes all inflation-protected public obligations issued by the U.S. Treasury with remaining maturities of less than 5 years.

The manager attempts to replicate the target index by investing all, or substantially all, of its assets in the securities that make up the index, holding each security in approximately the same proportion as its weighting in the index.

Highlights of VTIP:

  • Seeks to track an index that measures the performance of inflation-protected public obligations of the U.S. Treasury that have a remaining maturity of less than five years.
  • Designed to generate returns more closely correlated with realized inflation over the near term and offer investors the potential for less volatility of returns relative to a longer-duration TIPS fund.
  • Given its shorter duration, the fund can have less real interest rate risk and lower total returns relative to a longer-duration TIPS fund.
  • Invests in bonds backed by the full faith and credit of the federal government and whose principal is adjusted semiannually based on inflation.
  • Can provide protection from inflationary surprises or ”unexpected inflation.”

Fed Overlooking Inflation?

The time for an ETF like VTIP couldn’t come at a better time. Even as the Fed attempted to ease investor worries about inflation, some market analysts beg to differ.

“Fed Chairman Jerome Powell conceded at his press conference Wednesday that prices had caught the central bank by surprise, but he showed no particular concern,” a Wall Street Journal Opinion feature noted. “The Federal Open Market Committee’s statement Wednesday after its two-day meeting also showed little interest in reeling in what has been the most reckless monetary policy since Arthur Burns roamed the Eccles Building. History hasn’t been kind to Burns.”

For more news, information, and strategy, visit the Fixed Income Channel.