Signs are mounting that inflation is going to be a real consideration for asset allocators going forward. Investors can protect their portfolios from the ravages of rising prices with exchange traded funds, such as the FlexShares iBoxx 5Yr Target Duration TIPS ETF (NYSEArca: TDTF). The fund tracks the iBoxx 5-Year Target Duration TIPS Index.
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. Data confirm TDTF is a relevant consideration for investors today.
“We expect annual growth in the U.S. consumer price index (CPI) to average in the range of 2.5% to 3% between 2025 and 2030,” said BlackRock. “This is broadly consistent with inflation moderately above the Fed’s 2% target (CPI inflation tends to run above the Fed’s preferred gauge based on the personal consumption expenditures, or PCE, price index), and a jump from current market-implied inflation.”
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.
TDTF, which has nearly $591 million in assets under management, has 28 holdings and an impressive 30-day SEC yield of 4.12%, according to issuer data. The weighted average maturity of TDTF’s holdings is 6.56 years.
“Major central banks are evolving their policy frameworks and explicitly aim to let inflation overshoot their targets. After having persistently undershot its inflation goal, the Federal Reserve has adopted a new policy framework to deliberately push inflation above target to make up for past misses,” according to BlackRock.
The combination of easy monetary policy by global central banks and policy stimulus amid the COVID-19 pandemic is stoking inflation concern, thereby bolstering the case for ETFs such as TDTF.
“The third force is the joint monetary-fiscal policy revolution we have just experienced – a necessary response to the Covid shock. We see a risk scenario where major central banks lose grip of inflation expectations relative to their target levels,” notes BlackRock.
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