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Rising Inflation Fuels Demand for TIPS ETFs

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Growing inflationary pressures are bothering Americans as cost of living in the United States has risen steadily on higher gas prices. This is especially true given that inflation has been trending above the Fed’s 2% target over the past few months. The latest data showed that it accelerated at the fastest pace in more than six years in May. The Consumer Price Index rose 0.2% in May, bringing the annual inflation (12 months through May) to 2.8% -- the biggest gain since February 2012 and following a 2.5% increase in April.

The trend is likely to continue in the coming months given that the economy has expanded for nine years and the United States has now entered its second-longest expansion phase since 1785. After two months of lackluster gains, hiring in the United States rebounded with the addition of more-than-expected 223,000 jobs in May. Unemployment dropped from 3.9% to 3.8%, the lowest since 2000 while average hourly wages rose eight cents, pushing the year over year increase to 2.7%.

This has sparked a record $1.2 billion inflows into the top 10 ETFs focused on Treasury Inflation Protected Securities (TIPS) last week that hedge against the risk of inflation according to a JPMorgan Chase. Over the past two weeks, these TIPS ETFs have accumulated $1.74 billion in capital (read: Do ETF Investors Need Inflation Protection Now?).


TIPS ETFs offer shelter against rising inflation. It not only combats increasing prices but also protects income for the long term. To explain in details, consider a fixed interest rate of 2.0% on five-year TIPS with 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 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.

Given this, investors are considering TIPS ETFs in order to combat inflationary fears. While there are several options in the space to tap rising consumer prices, we have highlighted five that have garnered enough capital this month and could be better picks. With the economy and job market gaining strength, inflation will definitely increase in the coming months, making these products compelling investments (see: all the Inflation-Protected Bond ETFs here):

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

This fund tracks the Bloomberg Barclays US Treasury Inflation-Linked Bond Index (Series-L), holding 45 securities in its basket. It has effective duration of 7.5 years and average maturity of 8.2 years. SCHP is the cheapest option in the TIPS space, charging just 5 bps in annual fees. It has pulled in nearly $1.1 billion in capital this month, bringing its total AUM to $5.3 billion. The product trades in solid volume of 634,000 shares a day.

Vanguard Short-Term Inflation-Protected Securities ETF (VTIP - Free Report)

This fund saw inflows of $79.53 million this month, bringing its AUM to more than $5 billion. It offers exposure to TIPS that have remaining maturity of less than five years by tracking the Bloomberg Barclays U.S. Treasury Inflation-Protected Securities (TIPS) 0-5 Year Index. Holding securities 15 in its basket, the ETF has average duration and average maturity of 2.7 and 2.8 years, respectively. The product trades in average daily volume of 687,000 shares and charges 6 bps in annual fees (read: 3 ETFs to Better Prepare for Aggressive Rate Hikes).

SPDR Bloomberg Barclays TIPS ETF

This ETF has gathered $27 million in its asset base bringing its total AUM to $1.3 billion. It follows the Bloomberg Barclays U.S. Government Inflation-linked Bond Index and holds 40 securities in its basket. Average maturity comes in at 8.96 years while adjusted duration is 6.02 years. The fund charges 15 bps in annual fees and trades in good volume of 114,000 shares a day.

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

This fund offers exposure to short-term TIPS with effective duration of 2.64 years and average maturity of 2.69 years. It holds 12 securities in its basket and follows the Bloomberg Barclays U.S. Treasury Inflation-Protected Securities (TIPS) 0-5 Years Index (Series-L). STIP has pulled in $10 million capital this month, pushing it AUM to $1.8 billion. It has 0.06% in expense ratio and trades in average daily volume of 114,000 shares.

FlexShares iBoxx 3-Year Target Duration TIPS Index Fund (TDTT - Free Report)

This ETF tracks the iBoxx 3-Year Target Duration TIPS Index, holding 19 securities in its basket. Average maturity comes in at 4.25 years while adjusted duration is 3.11 years. The fund has AUM of more than $2 billion with inflows of nearly $2 million this month. It charges 18 bps in annual fees and trades in volume of 210,000 shares a day on average.

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