Some fixed income investors are betting inflation is set to move higher. At least that is one takeaway from the recent spate of inflows to a popular ETF tracking Treasury Inflation Protected Securities, or 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.
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).
“The iShares TIPS Bond ETF drew $158.7 million in investment flows Monday, tops among U.S. fixed-income products and its biggest intake since January. The exchange-trade fund, best known by its ticker TIP, holds U.S. government bonds whose principal and interest payments are adjusted for inflation,” reports Luke Kawa for Bloomberg.
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.
Investors flooded into the product in the immediate aftermath of the U.S. election, placing bets that the new administration would stoke inflation by enacting pro-growth fiscal policies. Amid a lack of progress on the legislative front, inflows had largely petered out,” according to Bloomberg.
The $23.3 billion TIP is the largest TIPS ETF on the market. TIP holds 35 securities and has an effective duration of 7.6 years. Duration measures a bond’s sensitivity to changes in interest rates.
For more information on Treasury inflation protected securities, visit our TIPS category.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.