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TIPS ETFs to Track as Inflation Soars the Most in 3 Decades

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Inflation has soared in the United States, with consumer prices increasing at the fastest pace in more than 30 years. The consumer price index (“CPI”) rose 6.2% year over year in October, the highest since December 1990 and exceeded the 5.4% year-over-year rise in September. Inflation also topped 5% for the fifth straight month.

Amid the inflationary backdrop, investing in TIPS ETFs, which offer shelter against rising inflation, would be prudent. There are several options in the space to tap rising consumer prices. Among them, iShares TIPS Bond ETF (TIP - Free Report) , Schwab U.S. TIPS ETF (SCHP - Free Report) , Vanguard Short-Term Inflation-Protected Securities ETF (VTIP - Free Report) , iShares 0-5 Year TIPS Bond ETF (STIP - Free Report) and Quadratic Interest Rate Volatility and Inflation Hedge ETF (IVOL - Free Report) are the five most popular that could be compelling investments.

Behind The Inflation Numbers

The pandemic-related supply shortages and continued strength in consumer demand continued to push the prices higher (read: ETF Strategies to Beat Likely "Hyperinflation" in the World).

The so-called core inflation, which strips out volatile components such as food and energy prices, rose 4.6% year over year in October — the largest annual increase since August 1991 — and 0.6% from the year-ago month. Energy costs jumped a whopping 30%, with gasoline soaring nearly 50%. Natural gas and heating oil prices are also soaring. The food index increased 5.3%. Fast food prices soared 7.1% in October from the year-ago month, representing the largest increase on record due to higher costs for beef and other foods as well as rapidly rising labor costs.

The trend is likely to continue in the coming months given the huge infrastructure and stimulus packages, wider reach of vaccinations and a healing job market that has led to a speedy recovery.

Why TIPS?

TIPS ETFs not only combat increasing prices but also protect income for the long term. To explain in detail, consider a fixed interest rate of 2.0% on five-year TIPS with an initial face value of $1,000. In the first six months, when inflation is zero, the semi-annual interest payment would be $10 but when inflation rises 5% annually in the next six months, the semi-annual interest rate would be $10.25 (1,025*2%-1/2 = 10.25).

This is because TIPS pays interest on an inflated-principal amount (principal rises with inflation) and, in this case, the principal becomes $1,025 when the semi-annual inflation is accounted for. As a result, both principal amount and interest payments will go on rising with increasing consumer prices (see: all the Inflation-Protected Bond ETFs here).

Below we have highlighted the details of five ETFs:

TIP

iShares TIPS Bond ETF is the most popular choice in the TIPS space with AUM of $36.9 billion and an average daily volume of 3.8 million shares. TIP tracks the Bloomberg Barclays U.S. Treasury Inflation Protected Securities Index (Series-L), holding 49 securities in its basket. The fund has an effective duration of 7.76 years and an average maturity of 8.20 years. It charges 19 bps in fees per year.

SCHP

Schwab U.S. TIPS ETF tracks the Bloomberg Barclays US Treasury Inflation-Linked Bond Index (Series-L), holding 47 securities in its basket. It has an effective duration of 7.70 years and an average maturity of 8.20 years. SCHP is among the cheapest options in the TIPS space, charging just 5 bps in annual fees. The fund has AUM of $21.9 billion and trades in a solid volume of 3 million shares a day.

VTIP

With AUM of $18.3 billion, Vanguard Short-Term Inflation-Protected Securities ETF offers exposure to TIPS with a maturity of less than five years by tracking the Bloomberg Barclays U.S. TIPS 0-5 Year Index. Holding 19 securities in its basket, VTIP has an average duration of 2.6 years and an average maturity of 2.7 years. The fund trades in an average daily volume of 2.2 million shares and charges 5 bps in annual fees (read: ETF Areas to Consider to Combat Rising Inflation Concerns).

STIP

iShares 0-5 Year TIPS Bond ETF offers exposure to short-term TIPS with an effective duration of 2.58 years and an average maturity of 2.60 years. The fund holds 17 securities in its basket and follows the Bloomberg Barclays U.S. TIPS 0-5 Years Index (Series-L). STIP has amassed $7.6 billion in its asset base and has 0.05% in expense ratio. It trades in an average daily volume of 577,000 shares.

IVOL

Quadratic Interest Rate Volatility and Inflation Hedge ETF is a first-of-its-kind fixed-income fund that seeks to profit from relative interest rate movements through Fed rate cuts or rising long-term interest rates. The fund seeks to profit from market stress when fixed-income volatility increases while providing the potential for enhanced, inflation-protected income. IVOL has AUM of $3.6 billion and charges 1.04% in annual fees. It trades in 1.3 million shares a day on average.