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Inflation Picks Up Pace: Time for TIPS ETFs?

Most of the world's developed nations have been striving to log 2% inflation. A prolonged plunge in oil prices over the last two and a half years has worsened the situation. However, the U.S. economy met the 2% target for the consumer price index for the first time in two and a half years last month. However, investors should note that the Fed's favored measure personal-consumption expenditures price index still remains below 2%. U.S. inflation was 1.4% in November (read: Saudi & China Boost Leveraged Oil ETFs ).

Coming to the consumer price index, U.S. consumer prices increased 2.1% year over year in December 2016, following a 1.7% uptick in November and was in line with market expectations. The inflation rate picked up pace for the fifth successive month to the highest level since June 2014, buoyed by the energy and shelter indexes which compensated for a drop in the food index.

However, food prices declined at a slower rate of 0.2%. Consumer prices increased 0.3% sequentially, higher than 0.2% clocked in November. The recent uptrend in oil prices, courtesy of the OPEC output cut deal, probably led to the rise in U.S. inflation. E nergy prices grew 5.4% annually, following a 1.1% rise in November.

Golden Days for TIPS ETFs

TIPS offer 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 has made TIPS ETFs investors' darlings in recent times as they are increasingly wagering on these inflation-protected bond ETFs. Though the expected trend of inflation depends a lot on the movement of energy prices, investors with a long-term view can count on the potential uptick in inflation as the U.S. economic backdrop remains robust. Also, Trump's promise for fiscal reflation makes us hopeful about further inflation.

Below we highlight a few TIPS ETFs which could be compelling investments if U.S. inflation continues to scale higher (see: all TIPS ETFs here ):

SPDR Bloomberg Barclays 0-5 Year TIPS ETF SIPE

The 15-security fund looks to track the price and yield performance of the Bloomberg Barclays 0-5 Year US Government Inflation-linked Bond Index. While the duration of the fund is 2.53 years, average maturity of the fund is 2.56 years. The fund charges 15 bps in fees. It added over 0.2% on January 19.

Vanguard Short-Term Inflation-Protected Securities ETF VTIP

The fund measures the performance of inflation-protected public obligations of the U.S. Treasury that have a remaining maturity of less than five years. The fund charges 8 bps in fees. Average effective maturity and duration are 2.5 years and 2.4 years, respectively. The fund was gained about 0.02% on January 19.

iShares 0-5 Year TIPS Bond STIP

The 14-security fund is composed of inflation-protected U.S. Treasury bonds with remaining maturities of below five years. Weighted average maturity and effective duration of the fund are 2.47 years and 2.43 years, respectively. The fund charges 10 bps in fees. STIP was up about 0.02% on January 19 (read: Will 2017 Be a Year of Global Reflation & TIPS ETFs? ).

PIMCO 1-5 Year US TIPS ETF STPZ

The 12-security fund reflects the returns of the shorter maturity subset of the Treasury Inflation-Protected Securities (TIPS) market by tracking The BofA Merrill Lynch 1-5 Year US Inflation-Linked Treasury Index. The fund aims to seize the real return (above inflation), capital protection and low volatility level associated with short maturity TIPS. The fund charges 20 bps in fees. Effective maturity and duration of the fund are 2.92 years and 2.89 years, respectively. The fund was up about 0.1% on January 19.

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SPDR-0-5YR TIP (SIPE): ETF Research Reports

VANGD-ST TIPS (VTIP): ETF Research Reports

PIMCO-1-5 YR TP (STPZ): ETF Research Reports

ISHARS-0-5YTIPS (STIP): 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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