iShares, BlackRock's ETF arm and the world's largest ETF provider, rolled out a bond fund focused on short term Treasury inflation-protected securities, or TIPs, zooming in on a part of the yield curve that many see as the place to be if this year's bond rally unravels.
TIPs ETFs are not new, but the iShares Barclays 0-5 Year TIPS Bond Fund (NYSEArca:STIP) is the San Francisco-based company's first targeting the shortest end of the curve. It will compete with the PIMCO 1-5 Year U.S. TIPS Index Fund (NYSEArca:STPZ), which has been on the market for a bit more than a year. Both ETFs have an annual expense ratio of 0.20 percent.
TIPS are used for protection against inflation through adjustments to principal that are linked to the U.S. consumer price index. They are also used to as a tool to diversify a portfolio because TIPS often show low correlation to other asset classes. STIP will invest in securities with less than five years to maturity, and some of the securities will have less than one year to maturity. That eliminates much of the risk associated with pre-existing longer-dated debt, which falls more sharply in price when interest rates rise.
"A STIP investor would receive higher distributions if inflation increases over time, but would also see less impact if interest rates rise than would an investor in a longer maturity TIPS fund," Matt Tucker, head of fixed income ETFs for iShares, said in a press release.
As investors look for ways to capture returns and protect themselves from volatility during an uneven economic recovery, demand for targeted fixed income exposure has been on the rise. Overall, U.S. fixed-income ETFs attracted $29.60 billion through November, trailing only international equities in asset gathering, according to data compiled by IndexUniverse.com.
About $580 million of the new money going into bond funds flowed into the broad-based iShares Barclays TIPS Bond Index Fund (NYSEArca:TIP), the single-biggest U.S. TIPs ETF that has a total of more than $20 billion.
TIPs With A Twist
STIP, unlike other TIPS ETFs, holds its securities until maturity, meaning it pays out inflation-adjusted income through distributions and then returns principle to the fund for the purchase of more securities. It said the methodology allows investors to capture most of their returns through inflation-adjusted income relative to other TIPS funds.
The fixed-income asset class, which today represents more than 10 percent of the total assets in the U.S. ETF space, has been particularly good for iShares, which has seen double the net flows into its fixed income ETFs than any other provider in 2010, the company said in the press release. iShares offers 33 different bond ETFs that together total about $93 billion in assets under management.
Newport Beach, Calif.-based PIMCO's short-term bond fund "STPZ" has gathered about $630 million in assets.
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