TIPS Time: Investors Love These Bond ETFs

Members of the Federal Reserve have been talking inflation this week. The Fed sees inflation at 2 percent before the end of 2017, well above the public's estimates.

Federal Reserve Bank of San Francisco President John Williams said earlier this week that inflation could rise faster than the pace at which the central bank is currently ticking. The renewed boom in exchange-traded funds holding Treasury Inflation-Protected Securities (TIPS) confirms investors and money managers are betting that inflation might just be an issue the Fed is not paying enough attention to.

Let's Here It For Asset-Gathering ETFs

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.

Related Link: Does TIP Have Any Tips For Inflation Fans?

That group now includes a TIPS, the iShares Barclays TIPS Bond Fund (ETF) TIP.

TIP And Peers

TIP is not the only TIPS packing on the assets, and there could be more asset gains to come for these ETFs as they are outperforming some other bond funds.

“In a record quarter investors have piled $2.14 billion into ETFs such as the iShares TIPS Bond ETF. Investors holding TIPS have been well rewarded this year. According to Markit’s iBoxx indices, TIPS have returned 4.2 percent so far this year, outperforming their more liquid non-inflation linked counterparts, treasuries,” said Markit in a research note.

In what could be a sign that investors are becoming increasingly concerned about the specter of inflation, flows to TIPS ETFs have been gaining steam in recent weeks. For example, TIP has added $1.55 billion in new assets this year with nearly $889 million of that arriving into the fund just this month.

The Schwab Strategic Trust SCHP has added $75.6 million in new assets this year, with $35.3 million of that total arriving this month. SCHP is one of the least expensive TIPS ETFs with an annual expense ratio of just 0.07 percent, or $7 per $10,000 invested.

The Fed's reluctance to raise rates “has helped commodity prices which have bounced off lows and inflation expectations, as represented by the 5-YearForward Inflation Expectation Rate which has risen 30bps to 1.72 percent since mid-February. Core inflation is also fast approaching the Fed’s 2 percent target. The easy monetary conditions were further echoed yesterday in a speech by Fed Chair Janet Yellen which had strong dovish connotations,” added Markit.

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