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Gas Prices Boost U.S. Inflation: Time for TIPS ETFs?

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U.S. consumer inflation started off 2017 at a five-year high reading. Inflation rose 2.5% year over year in January 2017, following a 2.1% rise in December and above market expectations of 2.4%. On a sequential basis, the consumer price index grew 0.6% in January, exceeding market expectations and last month's reading of 0.3%.

The inflation rate picked up pace for six months in a row to reach the highest level since March 2012, mainly helped by gasoline prices. On an annual basis, energy prices surged 10.8% in January, following a 5.4% expansion in December. Energy prices have been on an uptrend. The cost at the gas station upped to a nationwide average of $2.30 a gallon from under $2 last spring.

Investors should also note that multi-year low oil prices for about two years have been one of the key reasons for subdued global inflation. Now, with OPEC deciding on a production cut from early next year for six months, a certain uptick in oil prices has been realized from the year-ago level.

In any case, the U.S. inflationary outlook recently got a boost on Donald Trump's win in the presidential election. Trump's proposed $1 trillion spending plan and a slash in personal and corporate taxes have injected fresh optimism in the otherwise decent U.S. inflation (read: 5 Top-Ranked Sector ETFs Thankful to Trump ).

Food costs, which remained the same for six consecutive months, nudged up 0.1%. Barring food and energy, prices advanced 0.3% , which is above 0.2% recorded in the prior two months and surpassing expectations of 0.2%. In fact, Fed chair Yellen also indicated that inflation is no longer "at very low levels" (read: Yellen Gives Hawkish Signals: 5 ETF Plays ).

Party Time for TIPS ETFs

TIPS offers robust real returns during inflationary periods, unlike its unprotected peers in the fixed-income world. These securities pay an interest on an inflated-principal amount (principal rises with inflation) and when the securities mature, investors get either the inflation-adjusted principal or the original principal, whichever is greater. As a result, both principal amount and interest payments will keep on rising with increasing consumer prices (read: Forget Inflation Fears with These TIPS ETFs ).

This mechanism made TIPS ETFs investors' darlings in recent times as they are increasingly wagering on these inflation-protected bond ETFs. iShares TIPS Bond ETFTIP was one of the biggest beneficiaries of this trend, having hauled in $558.8 million so far this month (as of February 16, 2017), according to data compiled by etf.com .

As per an article published on Bloomberg , iShares' $22 billion TIPS ETF attracted about $6 billion - the second-biggest gain of all bond ETFs in 2016 - and advanced about 3.6%, the highest in three years.

In this regard, investors should take note of TIPS ETFs including FlexShares iBoxx 5-Year Target Duration TIPS Index Fund TDTF , FlexShares iBoxx 3-Year Target Duration TIPS Index FundTDTT and SPDR Barclays 1-10 Year TIPS ETF TIPX .

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ISHARS-TIPS BD (TIP): ETF Research Reports

SPDR-1-10YR TIP (TIPX): ETF Research Reports

FLEXS-IB 3Y TAR (TDTT): ETF Research Reports

FLEXS-IB 5Y TAR (TDTF): ETF Research Reports

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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