TIPS ETFs: Looking Beyond TIP

by on April 16, 2010 | ETFs Mentioned:

When governments around the world began implementing massive stimulus plans to lift the global economy from a deep recession, opinions were sharply divided. While it seems that these plans have been successful in the short run–as evidenced by the remarkable rally over the last 13 months–some investors have become increasingly concerned about the long-term impact of such significant spending. Most of these concerns have centered around the prospect of runaway inflation resulting from a huge increase in the money supply. While current inflation at nearly zero, almost everyone believed that some upward movement was inevitable, but the magnitude of the increase was the subject of much debate; estimates ranged from the high end of the Fed’s “comfort zone” to well into double digits. 

A recent study from the Wall Street Journal now suggests that economists are “evenly divided between those who fear inflation will accelerate over the next year and those who see a bigger risk that the inflation rate will slow from already low levels.” When questioned about the bigger risk to the economy over the next month, half of the respondents said accelerating inflation and half said slowing inflation. Phil Izzo notes that this disagreement is also present within the Federal Reserve. “At their March policy meeting, some officials argued the downturn in house prices is causing key measures to understate prices increases; others focused on the decline in inflation measures that exclude food and energy,” writes Izzo (see Why Biflation Is The Real Threat).

Inflation is always a critical economic indicator, but its importance has become even greater in the current environment. The Fed is seemingly prepared to leave interest rates near record lows for the foreseeable future, but a material increase in inflation could force Bernanke’s hand and send rates higher.

Still On The Mind Of Investors

TIPS ETFs
TIP IPE TIPZ WIP
Expense Ratio 0.20% 0.18% 0.20% 0.18%
Daily Volume ,000 52,900 1,900 147,100
Effective Duration* 5.1 7.8 6.2 9.2
30 Day SEC Yield 0.82% 0.91% 1.86% 1.4%
Average Coupon 2.21% 2.27% n/a 3.2%

While economists may be divided over the pace of inflation in coming months, investors clearly remain concerned about protecting their portfolios from a big uptick in CPI. Cash continues to flow into ETFs representing asset classes typically viewed as inflation hedges, including gold and broad-based commodities. Among ETF investors, TIPS funds have seen a huge surge in popularity. By far the most popular option in the Barclays TIPS Bond Fund (TIP), which has assets of more than $20 billion and trades more than 1 million shares daily.

But TIP is much more than the tip of the iceberg when it comes to inflation-protected bond ETFs; this fund accounts for more than 90% of the assets in the Inflation Protected Bonds ETFdb Category. But there are handful of other ETFs that also invest in inflation-protected Treasuries. While all these ETFs will generally be impacted by the same macroeconomic factors–most importantly CPI reports and interest rates–there are some differences between the funds that may result in different returns and risk factors. Below, we profile three additional TIPS ETFs (also see Beyond TIP: 10 ETFs To Protect Against Inflation):

  • SPDR Barclays Capital TIPS ETF (IPE): This ETF is seeks to replicate the performance of the Barclays U.S. Government Inflation-Linked Bond Index, a benchmark that includes TIPS with at least one year to maturity and fixed or zero coupons. IPE has the lowest expense ratio in the ETFdb Category, charging just 0.18% annually.

  • PIMCO Broad U.S. TIPS Index Fund (TIPZ): This passively-indexed ETF is linked to the BofA Merrill Lynch US Inflation-Linked Treasury Index, which includes TIPS with at least $1 billion in outstanding face value (the index underlying IPE has a $500 million minimum). TIPZ is currently offering a relatively high 30 Day SEC Yield of nearly 1.9%, well above both TIP and IPE.

  • SPDR DB International Government Inflation-Protected Bond ETF (WIP): This ETF offers exposure to inflation-protected bonds issued by foreign governments, thereby offering an alternative for investors looking to avoid exposure to the U.S. government. WIP’s largest country exposure is to the UK (19%), followed by France (18%), Mexico (5%), and Israel (5%). Not surprisingly, WIP maintains a higher average coupon that most U.S.-focused TIPS ETFs, owing to its inclusion of securities from both developed and emerging markets.

Disclosure: No positions at time of writing.