Score Targeted Duration and Inflation Protection with This ETF

Getting targeted duration in Treasury Inflation-Protected Securities (TIPS) can present significant nuances, helping to build the case for an ETF like the FlexShares iBoxx 3-Year Target Duration TIPS Index Fund (TDTT).

TDTT seeks to provide investment results that correspond generally to the price and yield performance of the iBoxx 3-Year Target Duration TIPS Index. The underlying index reflects the performance of a selection of inflation-protected public obligations of the U.S. treasury, commonly known as “TIPS,” with a targeted average modified adjusted duration, as defined by the index provider, of approximately three years.

According to a FlexShares Fund Focus report, the fund “allocates the majority of its exposure to a core group of five issues with durations closest to its target of three years. The index typically holds between 10 and 15 issues and is rebalanced monthly to maintain that target duration.”

“If the index’s MAD shifts because of changing inflation expectations, issues with longest or shortest durations are reallocated to holdings closest to the index’s duration target,” the report added. “The index also has constraints in place to avoid violating wash-sale rules, which means the index can’t re-purchase a bond it sold the month before.”

FlexShares believes fixed income investors should specifically focus on modified-adjusted duration (MAD) when it comes to targeted duration in TIPS.

“We believe that targeting the durations of TIPS more precisely can help investors better manage their investment risks by tailoring more effective inflation-hedging strategies for their portfolios,” the report added. “Yet keeping a TIPS portfolio close to its target duration can be a time-consuming and costly process that requires constant oversight and trading to keep the MAD within that target range.”

Auto Part Prices May Portend More Inflation

Prices are already on the move for auto parts. According to a Fox Business report, prices for auto parts “are rising faster than expected and inflation will heat up into year-end, according to the chief financial officer of Advance Auto Parts, one of the country’s biggest aftermarket parts providers.”

The report noted that COVID-19 is causing supply-chain disruptions as a result of labor shortages, higher wages as employers bid for more workers, and rising costs in materials. Furthermore, it’s difficult to gauge whether inflation has really peaked or not.

“There is more inflation coming,” said Advance Auto Parts CFO Jeffrey Shepherd on the company’s second quarter earnings call.

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