Coming Soon From iShares: 0-5 Year TIPS Bond ETF

by on September 20, 2010 | ETFs Mentioned:

As investors pile into gold and other precious metal ETFs, expectations of an eventual surge in inflation seem to be building–even through deflation may be the more immediate concern. Another popular way to protect against such a development has been with inflation protected bonds, securities that can offer investors protection against inflation by adjusting principal in line with changes in CPI while also paying out dividends–something that most precious metal ETFs (at least those not collateralized by U.S. Treasury bonds) cannot match. Due to these payouts, these funds have becomes extremely popular with investors; the top ETF in the Inflation-Protected Bond ETFdb Category, the iShares Barclays TIPS Bond Fund (TIP), has taken in over $20 billion in assets and trades more than 800,000 shares daily.

Yet some investors who are concerned about long-term bonds may have reservations about TIP, which currently has less than 40% of its total assets in bonds maturating in less than five years and slightly more than 25% of its assets in bonds maturing more than 15 years from now. Due to this, a number of funds have stepped in to take advantage of this gap, with PIMCO leading the way in terms of segmenting the TIPS market. Now iShares is planning another addition to its TIPS ETF lineup, recently detailing plans for another fund [read PIMCO Boosts ETF Presence].

According to a recent filing with the SEC, iShares has sought regulatory approval in order to launch the Barclays 0-5 Year TIPS Bond Fund. This proposed fund will follow the Barclays Capital U.S. Treasury Inflation-Protected Securities (TIPS) 0-5 Years Index, a benchmark that measures the performance of the inflation-protected public obligations of the U.S. Treasury that have a remaining maturity of less than five years. As of August 30, 2010, there were 13 issues in the underlying index, which is market cap-weighted and updated on the last calendar day of each month.


The short-term TIPS market is currently relatively sparse, however, the proposed iShares fund looks likely to compete with a similar fund from bond giant PIMCO, the 1-5 Year U.S. TIPS Index Fund (STPZ). This ETF charges an expense ratio of just 20 basis points and has already build up a significant following with over half a billion dollars in assets. STPZ tracks the BofA Merrill Lynch 1-5 Year US Inflation-Linked Treasury Index, a benchmark consisting of U.S. Treasury Inflation Protected Securities with at least $1 billion in outstanding face value and a remaining term to final maturity of at least 1 year and less than 5 years [also see iShares Files For Global TIPS ETF].

The proposed fund from iShares looks to offer investors a shorter effective duration than its counterpart from PIMCO due to the inclusion of bonds maturing in less than one year. While it appears as if STPZ will offer investors a similar level of concentration as both of the funds have roughly the same number of holdings (STPZ has 12 holdings while iShares’ proposed fund’s underlying index has 13) this could change in the near future since STPZ requires nearly four times the level in terms of minimum outstanding face value in order to include the bonds in the fund. No matter what happens, it looks to be an interesting end to the year as competition finally begins to hit up in the increasingly important bond ETF space [also read 2010: Year Of The Bond ETF] .

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Disclosure: No positions at time of writing.