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Why This is The Time for TIPS ETFs

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Annual inflation rate in the United States accelerated to 5.4% year over year in June of 2021 from 5% in May, hitting a fresh high since August of 2008, and well above forecasts of 4.9%.  The latest uptick in inflation was the largest 12-month increase.

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.9% sequentially in June on a seasonally adjusted basis after rising 0.6% in May, the U.S. Bureau of Labor Statistics reported. This marked the largest one-month change since June 2008 when the index rose 1.0%.

Inflation has been on an uphill ride this year thanks to low base effects from 2020 and as the economic recovery picks up, business restrictions relax and demand jumps amid widespread vaccination and fiscal stimulus.

If this was not enough, interest rates have been hovering around low levels thanks to a dovish Fed and uncertainty prevailing due to the surge in delta variant of Covid-19. Plus, OPEC+ deadlock regarding cracking the further output cut deal may cause additional tensions in the global energy market and investors may rush to safe-havens like U.S. treasuries, bringing down bond yields further. The U.S. benchmark treasury yields were 1.38% on Jul 12 versus 1.48% at start of the month.

If this happens, we may see a bond rally ahead.

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.

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.   

Below we highlight a few TIPS ETFs that could be under watch in the recent times.

ETFs in Focus

iShares TIPS Bond ETF (TIP - Free Report)

The underlying Bloomberg Barclays U.S. Treasury Inflation Protected Securities (TIPS) Index (Series-L) measures the performance of the inflation-protected public obligations of the U.S. Treasury. The fund charges 19 bps in fees. The fund yields 2.51% annually.

Schwab U.S. TIPS ETF (SCHP - Free Report)

The underlying Bloomberg Barclays US Treasury Inflation-Linked Bond Index (Series-L) 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 $500 million or more of outstanding face value. The fund charges 5 bps in fees. The fund yields 2.47% annually.

Vanguard Short-Term Inflation-Protected Securities ETF (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. The fund yields 2.28% annually.

iShares 0-5 Year TIPS Bond ETF (STIP - Free Report)

The underlying Bloomberg Barclays U.S. Treasury Inflation-Protected Securities (TIPS) 0-5 Years Index (Series-L) comprises of inflation-protected U.S. Treasury bonds with remaining maturities of less than five years. The fund yields 2.58% annually (read: ETF Strategies to Tackle the Rising Inflation Levels).

Quadratic Interest Rate Volatility & Inflation Hedge ETF (IVOL - Free Report)

The Quadratic Interest Rate Volatility and Inflation Hedge ETF is actively managed and seeks to achieve its investment objective primarily by investing, directly or indirectly, in a mix of U.S. Treasury Inflation-Protected Securities and long options tied to the shape of the U.S. interest rate curve. The fund yields 3.61% annually.