How Investors Can Prepare for Return of Inflation

Inflation has been benign for most of the current bull market in U.S. equities, but data suggests that is changing, which could mean it is time for fixed income investors to consider Treasury Inflation Protected Securities, or TIPS.

ETF investors can gain exposure to Treasury inflation protected securities through a number of options, including the iShares TIPS Bond ETF (NYSEArca: TIP), Schwab U.S. TIPS (NYSEArca: SCHP) and SPDR Barclays TIPS ETF (NYSEArca: IPE).

“Investors are slowly waking up to an outlook of mildly higher U.S. inflation amid a backdrop of solid economic growth,” said BlackRock in a recent note. “This year’s surprise was better-than-expected growth coinciding with cooling inflation, partly due to one-off factors. We see that changing in 2018 as the U.S. economic slack created by the deep 2007–09 recession disappears.”

TIPS are a type of Treasury security that is 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.

TIP is home to $24 billion in assets under management, making it the largest of the TIPS ETFs. The ETF has an effective duration of 7.61 years. Duration measures a bond’s sensitivity to changes in interest rates.