With Inflation Chatter Gaining Momentum, It's This ETF's Time to Shine

For years, inflation was benign, a mere afterthought for many advisors and investors. Now, with the world awash in low-interest rates and easy monetary policy, inflation is a growing consideration for asset allocators, meaning the FlexShares iBoxx 3-Year Target Duration TIPS Index Fund (NYSEArca: TDTT) could be ready to enter the limelight.

Statistically speaking, inflation remains benign, but with central banks around the world debasing currencies and the Federal Reserve likely to keep rates near zero for an extended period, the desired result of inflation may not be far off.

Treasury Inflation-Protected Securities (TIPS) are popular among fixed-income investors looking to protect against the scourge of inflation and ETFs make it easier to access TIPS.

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.

TDTT Matters Today

Data confirm the $1.43 billion TDTT is worth considering in the current environment.

“Following recent data showing that core CPI had the largest monthly increase since 1991, worries of inflation over the long-term are heightening,” according to FlexShares. “For investors, that also means a green light to start inflation preparation. TIPS funds offer a useful tool in an environment where inflation data exceeds forecasts, to shield investors from the negative effects of inflation. The key is to be proactive with inflation-watch, and invest in TIPS ahead of an inflationary period. This will provide investors the best preventative measure with interest rates continuing to sit near historic lows.”

TDTT would be particularly useful in an environment where inflation data exceeds forecasts, meaning investors should monitor the breakeven inflation rate.

TDTT “offers exposure to the Treasury Inflation-Protected Securities market while maintaining a three-year target duration for a reasonable fee. Its short and targeted duration provides a high correlation to immediate inflation changes and reduces unintended interest-rate risk. However, it has a lower yield than its peers, and there are comparable funds at lower costs,” said Morningstar in a recent note.

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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.