A predictable result of rising inflation is investors embracing Treasury inflation-protected securities (TIPS), and with the Consumer Price Index (CPI) on a torrid pace of monthly gains — not what investors want to see — market participants are scurrying to TIPS exchange traded funds.
Fixed income ETFs are already setting a hot pace of asset-gathering this year, a trend getting a big assist from TIPS funds such as the Vanguard Short-Term Inflation-Protected Securities Index Fund ETF Shares (VTIP ). VTIP follows the Bloomberg U.S. Treasury Inflation-Protected Securities (TIPS) 0–5 Year Index, meaning that it holds TIPS with maturities of five years and less.
“The largest fund in this sector is Vanguard Short-Term Inflation-Protected Securities ETF. It has had net inflows of nearly $12 billion since Jan. 1, boosting its assets under management to about $54 billion,” reports Lori Ioannou for the Wall Street Journal.
Obviously, it’s notable that cash is flowing into TIPS ETFs at breakneck speeds, but what’s equally as important is the variety of investors that are allocating to these funds. The list includes retail investors, registered investment advisors (RIAs), and institutional investors. Those groups appear to be heeding signs from the Federal Reserve that rising consumer prices could be more persistent than originally hoped.
“These include: supply-chain and labor shortages; the rise in energy, food and housing prices; and a boom in consumer demand. In August, the consumer-price index, or CPI—a measure of personal consumption—was up 5.3% over the same period last year. That marked the highest level of inflation in 13 years,” according to the WSJ.
Good news for investors: TIPS ETFs, broadly speaking are cost-effective. Three of the funds in this category, including the aforementioned VTIP, charge just 0.0.5% per year, or $5 on a $10,000 investment. Another seven charge 0.19% or less annually.
Investors considering TIPS ETFs should monitor the break-even inflation rate, which is published by the St. Louis branch of the Fed.
“This rate reflects a market-based measure of expected inflation. For example, the break-even inflation rate for 10-year Treasurys on Sept. 27 was 2.40%. If an investor feels inflation will be higher than 2.40% over the next 10 years, then the 10-year TIPS would be considered a better buy than the standard 10-year U.S. Treasury,” notes the WSJ.
Assuming deflation doesn’t come to pass, one of the biggest risks facing TIPS investors is that basic Treasuries typically yield more than TIPS when inflation rises, indicating that there’s an income sacrifice to be made to gain the inflation hedge.
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