Wednesday’s ETF To Watch: iShares Barclays TIPS Bond Fund (TIP)

by on December 15, 2010 | ETFs Mentioned:

U.S. equity markets have posted a strong showing final months of the year following a frustrating “range-bound” period between June and September. December has been a cheerful month overall for investors, with the Dow Jones Industrial Average and S&P 500 both soaring to multi-month highs [consider The Problem With Dow ETFs]. Gold has not been a stranger to the headlines either, with the yellow metal surging to just over $1,400 an ounce, fueled by cautious bulls building positions in the traditional safe haven.

On tap for today is the monthly release of the Consumer Price Index (CPI) at 8:30 AM (ET). The CPI is a measure of the average price level of a fixed basket of goods and services purchased by consumers, and thus its month-over-month changes are generally representative of inflation. Investors and traders alike place a good deal of importance on the release of the CPI, since it is a well watched economic indicator and is very capable of moving markets. Analyst consensus is that the CPI month-over-month change will stay at 0.2%, while the year-over-year figure is predicted to drop from 1.2% to 1.1%, beating out the near-record low y-o-y level of inflation that was recorded last month. While inflation levels have been extremely low, this has not stopped traders and investors from worrying about CPI levels; many are anticipating a much higher rate of inflation fueled by QE programs and a weaker dollar in the near future. In fact, some may already be beginning to lose confidence in the greenback as evidenced by the rough slide in Treasury bond prices over the last few weeks.

Investors interested in adding a hedge to their portfolio might want to consider inflation-protected bonds. The most liquid of the exchange-traded products available is the iShares Barclays TIPS Bond Fund (TIP), an ETF that looks to be especially impacted by any changes in the inflation rate or expectations about future inflation trends. The fund tracks the Barclays Capital TIPS Index, which includes all publicly issued, U.S. Treasury inflation-protected securities that have at least one year remaining to maturity, are rated investment grade, and have $250 million or more of outstanding face value. TIP serves as an excellent inflation-protected tool, while also paying investors monthly dividends with an annual yield of around 2.5%.

TIPS rise and fall with inflation, as the two are directly correlated and their low-volatility makes them attractive products for investors wishing to diversify their portfolios. Today’s CPI results will weigh on TIP, as the yields and prices offered by inflation-protected securities depend on consumer price index levels. A drop in the CPI would likely mean a plunge in value for these funds, however, if the data surprises on the upside, TIP could have a strong day as it would signal that the long-awaited wave of inflation has arrived [see Inflation-Fighting ETFs Back In Focus].

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Disclosure: No positions at time of writing.