The Bond ETF Trade Investors Have Nailed

Well, there have been plenty of fixed income trades that have gone right for investors this year, but one that data suggest is really taking shape is the move to Treasury Inflation-Protected Securities, or TIPS.

And those data points extend beyond the substantial inflows accrued by the iShares Barclays TIPS Bond Fund (ETF)TIP, though it is impressive that TIP has hauled in more than $3.1 billion in new capital this year. The Schwab US TIPS ETF (Schwab Strategic Trust SCHP) has added over $625 million in new assets.

A Perfect Storm

This year is something of a perfect storm for TIPS. Inflation is an increasingly important topic for the Federal Reserve, and investors have been pouring billions of dollars into fixed income exchange-traded funds.

Related Link: Another Milestone For Bond ETFs

Federal Reserve Bank of San Francisco President John Williams said earlier this year 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.

Recent gains in wage growth could be another sign TIPS are one of the places to be in the fixed income space.

“The U.S. inflationary environment should also continue to benefit from another important driver in coming months: The ‘low volatility’ components of the core Consumer Price Index (CPI). These components, which have persistently trended higher, are key for driving the direction of inflation overall. Their upward trend is unlikely to reverse anytime soon given that these “good inflation’ categories are indicative of a solid labor and consumption environment,” according to BlackRock.

The rub for investors with hedging against inflation via ETFs is these funds are not great income generators. For example, the real yield on TIP, the iShares product, is just 0.08 percent, according to issuer data. Real yield is an investment's returns adjusted for inflation.

Still, there is a strong case for embracing ETFs like TIP and SCHP.

Further Justification

:“But what about relatively low market-based inflation expectations? They are understandable given that low money velocity has been a continual drag on economic growth, but I believe they may not fully reflect the dynamics described in the charts above. We could see them move higher if fiscal policy arrives to support and work in conjunction with its monetary policy counterpart. Of course, if we fail to see such a policy transition in the next couple years, stagflation would certainly become a risk,” added BlackRock.