Temptation With TIPS With This ETFs

In the U.S., inflation, excluding energy and food costs, has been hard to come by in recent years. Inflation fans, if such a group exists, probably should not too get excited, but it is worth noting that inflation rose modestly in December and January.

While it remains to be seen if data from those months marks the start of a legitimate higher inflation trend, investors can prepare with exchange traded funds such as the $15.6 billion iShares TIPS Bond ETF TIP.

When it comes to yield, TIP and rival treasury inflation protection securities (TIPS) ETFs are not going to wow anyone. In fact, TIP has 30-day SEC yield of -3.63 percent yield and a real yield of just 0.24 percent, according to BlackRock data. Real yield is the return investors can expect adjusted for inflation.

Data indicate TIP might just merit consideration at the moment.

“We can see that headline inflation has broken out of its near 0 percent level and is up to 1.4 percent annualized. If we look at CPI ex food and energy, we see a similar pattern: recent increases have pushed inflation up to 2.2 percent. And while it may seem like the little boy who cried wolf — the story gets a little mixed when inflation expectations crashed mid-2015 — we can see that expectations have recently resurfaced, climbing back towards the 1 percent level,” said Matt Tucker, iShares head of fixed income strategy in a recent note. 

As has been well-documented, fixed income funds are the toast of the ETF universe this year with six such funds among this year's top 10 asset-gathering ETFs. TIP is not one of those ETFs, but it is not far off the pace. In a sign that some investors are already preparing for inflation, TIP has raked in $914.2 million in new assets. 

“OK so we know that both realized inflation and inflation expectations have increased. For investors who are looking to protect their portfolio from further inflation increases, my colleagues and I agree: Treasury Inflation Protected Securities can be a good choice. TIPS are bonds issued by the U.S. Treasury whose payments increase when inflation increases. If inflation rises, so does the bond’s dollar coupon payment, and the amount you receive at maturity does, too,” adds Tucker.