With another round of QE underway and strong demand for raw materials from emerging markets, inflation is once again on the mind of investors. Those looking to protect their portfolios from a surge in CPI have a number of options, ranging from gold to broad-based commodity baskets to equities of commodity-intensive companies. But among the most popular inflation hedges are TIPS, Treasuries that adjust principal amount based on changes in CPI. Demand for these securities has become so significant that in a recent TIPS auction the yield hit -0.5%. When seeking out TIPS exposure, investors have increasingly turned towards ETFs.
Among the most popular products tracking TIPS is the iShares Barclays TIPS Bond Fund (TIP), which has amassed $20 billion in assets. The fund has a broad focus across a variety of maturity levels, with one third of the holdings allocated to short-term securities and one-quarter of the assets going towards long-term bonds. Additionally, a variety of more focused funds have begun to pop-up across the landscape, with products targeting various stretches of the maturity curve raking in assets. On Friday, iShares capped off a wild week in the ETF industry with another option, debuting the Barclays 0-5 Year TIPS Bond Fund (STIP).
This new fund will seek to replicate the Barclays Capital U.S. Treasury Inflation-Protected Securities (TIPS) 0-5 Years Index (Series-L), a benchmark that includes inflation-protected obligations of the U.S. Treasury that have a remaining maturity of less than five years. A short-term TIPS fund should appeal to investors concerned about an uptick in inflation. Though TIPS are one of the most popular options for protecting portfolios from the ravages of inflation, there is concern that these securities may disappoint if prices surge. TIPS are, after all, bond funds, meaning that they are sensitive to changes in the interest rate. Inflationary environments are often accompanied by interest rate hikes, which tends to push down bond prices. The ultra-popular TIP is spread out across the maturity spectrum, with about 65% of holdings maturing in more than five years and 25% of assets maturing in more than 15 years. The shorter duration of STIP should make it less sensitive to interest rate changes [see Bond ETFs: 12 Stops Along The Risk/Return Spectrum].
“iShares has long been the fixed income ETF leader, and we have continued to see strong interest in our fixed income products this year, as investors look for protection from inflation and further diversification in their portfolios,” said Matt Tucker, Head of Fixed Income Investment Strategy for iShares at BlackRock. “The new iShares Barclays 0-5 Year TIPS Bond Fund offers investors these same attributes along with a low sensitivity to interest rates. For example, a STIP investor would receive higher distributions if inflation increases over time, but would see less impact if interest rates rise than would an investor in a longer maturity TIPS fund.”
This new fund from iShares looks to face stiff competition in the increasingly crowded TIP bond space. There are not eight ETFs in the Inflation-Protected Bonds ETFdb Category, and the new iShares fund will be the second to target the short short-term TIPS market. A similar PIMCO fund, the 1-5 Year US TIPS Index ETF (STPZ), debuted about 15 months ago, and has over $600 million in assets with trading volumes approaching 80,000 shares a day. STPZ is one of PIMCO’s indexed products, seeking to replicate the BofA Merrill Lynch 1-5 Year US Inflation-Linked Treasury Index.
However, one key difference exists between these two products; the PIMCO fund does not invest in bonds that have less than one year until maturity while STIP does. As such, look for STPZ to have a slightly higher payout but also been more impacted by changes in interest rates [see Inflation-Fighting ETFs Back In Focus]. Like STPZ, the new iShares TIPS fund will charge 0.20%.
Disclosure: No positions at time of writing.