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The annual inflation rate in the United States jumped to 4.2% in April 2021 from 2.6% in March and well above market forecasts of 3.6%. It marked the highest reading since September 2008, thanks to the surge in pent-up demand amid economic reopening. Surging commodity prices and a supply crunch have also been aiding to the inflation.
There is also a base effect weighing as the coronavirus outbreak had dented economic activity, taking the inflation rate to 0.3% in April 2020. The biggest increases were recorded for gasoline (49.6% vs. 22.5% in March), fuel oil (37.3% vs. 20.2%), and used cars and trucks (21% vs. 9.4%). Inflation also accelerated for shelter (2.1% vs. 1.7%) and new vehicles (2% vs. 1.5%) and rebounded for apparel (1.9% vs. -2.5%).
Great Time for TIPS ETFs?
TIPS ETFs offer robust real returns during inflationary periods unlike its unprotected peers in the fixed-income world. These securities pay an interest on an inflated-principal amount (principal rises with inflation) and when the securities mature, investors get either the inflation-adjusted principal or the original principal, whichever is greater. As a result, both the principal amount and the interest payments will keep on increasing with rising consumer prices (read: Inflation Zooms to 13-Year High: 5 Solid TIPS ETF Picks).
This mechanism has made TIPS ETFs investors’ darlings in recent times as they are increasingly betting on inflation-protected bond funds. Though the expected trend of inflation depends a lot on the movement of energy prices, investors with a long-term view can count on the potential uptick in inflation as the U.S. economic backdrop appears more stable than before.
Needless to say, TIPS ETFs will soar amid such a situation. Below we highlight a few TIPS ETFs that are hovering around an all-time high.
The underlying Bloomberg Barclays U.S. Treasury Inflation-Protected Securities (TIPS) 0-5 Year Index is a market capitalization-weighted index that includes all inflation-protected public obligations issued by the U.S. Treasury with remaining maturities of less than 5 years. The fund charges 5 bps in fees.
The underlying Bloomberg Barclays U.S. Treasury Inflation-Protected Securities (TIPS) 0-5 Years Index (Series-L) comprises inflation-protected U.S. Treasury bonds with remaining maturities of less than five years. The fund charges 5 bps in fees.
The underlying ICE BofAML 1-5 Year US Inflation-Linked Treasury Index comprises 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 5years. It charges 20 bps in fees.
Purebetasm 0-5 Year US TIPS Invesco ETF (PBTP - Free Report)
The underlying ICE BofAML 0-5 Year US Inflation-Linked Treasury Index measures the performance of US Treasury Inflation-Protected Securities with a remaining maturity of at least one month and less than five years. The fund charges 7 bps in fees.
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4 TIPS ETFs at All-Time High
The annual inflation rate in the United States jumped to 4.2% in April 2021 from 2.6% in March and well above market forecasts of 3.6%. It marked the highest reading since September 2008, thanks to the surge in pent-up demand amid economic reopening. Surging commodity prices and a supply crunch have also been aiding to the inflation.
There is also a base effect weighing as the coronavirus outbreak had dented economic activity, taking the inflation rate to 0.3% in April 2020. The biggest increases were recorded for gasoline (49.6% vs. 22.5% in March), fuel oil (37.3% vs. 20.2%), and used cars and trucks (21% vs. 9.4%). Inflation also accelerated for shelter (2.1% vs. 1.7%) and new vehicles (2% vs. 1.5%) and rebounded for apparel (1.9% vs. -2.5%).
Great Time for TIPS ETFs?
TIPS ETFs offer robust real returns during inflationary periods unlike its unprotected peers in the fixed-income world. These securities pay an interest on an inflated-principal amount (principal rises with inflation) and when the securities mature, investors get either the inflation-adjusted principal or the original principal, whichever is greater. As a result, both the principal amount and the interest payments will keep on increasing with rising consumer prices (read: Inflation Zooms to 13-Year High: 5 Solid TIPS ETF Picks).
This mechanism has made TIPS ETFs investors’ darlings in recent times as they are increasingly betting on inflation-protected bond funds. Though the expected trend of inflation depends a lot on the movement of energy prices, investors with a long-term view can count on the potential uptick in inflation as the U.S. economic backdrop appears more stable than before.
Needless to say, TIPS ETFs will soar amid such a situation. Below we highlight a few TIPS ETFs that are hovering around an all-time high.
ETFs in Focus
Short-Term Inflation Protected Vanguard (VTIP - Free Report)
The underlying Bloomberg Barclays U.S. Treasury Inflation-Protected Securities (TIPS) 0-5 Year Index is a market capitalization-weighted index that includes all inflation-protected public obligations issued by the U.S. Treasury with remaining maturities of less than 5 years. The fund charges 5 bps in fees.
0-5 Year TIPS Bond iShares ETF (STIP - Free Report)
The underlying Bloomberg Barclays U.S. Treasury Inflation-Protected Securities (TIPS) 0-5 Years Index (Series-L) comprises inflation-protected U.S. Treasury bonds with remaining maturities of less than five years. The fund charges 5 bps in fees.
1-5 Year US TIPS Index ETF Pimco (STPZ - Free Report)
The underlying ICE BofAML 1-5 Year US Inflation-Linked Treasury Index comprises 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 5years. It charges 20 bps in fees.
Purebetasm 0-5 Year US TIPS Invesco ETF (PBTP - Free Report)
The underlying ICE BofAML 0-5 Year US Inflation-Linked Treasury Index measures the performance of US Treasury Inflation-Protected Securities with a remaining maturity of at least one month and less than five years. The fund charges 7 bps in fees.
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>