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The Federal Reserve stayed put on its interest rate policy on Jan 29, after three rate cuts in 2019. It also hinted at keeping interest rates unchanged in 2020 unless there is any drastic change in the economic outlook. The central bank has kept the benchmark interest rates at the band of 1.50-1.75%. The Federal Reserve put stress on the importance of raising inflation to officials’ target.
The Fed has acknowledged the strength of the U.S. job market while raised concerns about the new coronavirus from China. Fed chair Powell indicated that the coronavirus outbreak is “a significant thing which will have some effects on the Chinese economy, at least in the short term.” The World Health Organization plans to reconsider whether the new virus outbreak from China should be seen as a global pandemic.
Great Time for TIPS ETFs?
TIPS offers 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 principal amount and interest payments will keep on increasing with rising consumer prices.
This mechanism may make TIPS ETFs an investors’ darling in the coming days as the U.S. central bank affirms commitment to higher inflation. The Fed committee tried to notify that their policy is inclined to “inflation returning to the Committee’s symmetric 2 percent objective.”
Though the expected trend of inflation depends a lot on the movement of energy prices (which are likely to be depressed due to the coronavirus outbreak), 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 (read: Virus Scare Weighs on Oil ETFs: Go Short for the Near Term).
Along with rising inflation expectations, the coronavirus event should bode well for bond ETFs as a whole as the safe-haven rally has dragged down the treasury yields (read: Don't Panic About Virus, Buy 5 Beaten-Down Top-Ranked ETFs).
TIPS ETFs in Focus
Below we highlight a few TIPS ETFs that are hovering around a one-month high at the current level.
15+ Year US TIPS Index ETF Pimco (LTPZ - Free Report) – Up 0.9% on Jan 29
The underlying ICE BofAML 15+ Year US Inflation-Linked Treasury Index comprises of U.S. Treasury Inflation Protected Securities with at least $1 billion in outstanding face value and a remaining term to final maturity greater than 15 years. It charges 20 bps in fees and yields 1.66% annually.
Schwab U.S. TIPS ETF (SCHP - Free Report) – Up 0.4% on Jan 29
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 and yields 1.99% annually (read: Low-Beta ETFs to Tap Amid Stock Market Selloff).
SPDR Portfolio TIPS ETF (SPIP - Free Report) – Up 0.4% on Jan 29
The underlying Bloomberg Barclays U.S. Government Inflation-linked Bond Index includes publicly issued, U.S. Treasury inflation protected securities that have at least one year remaining to maturity on index rebalancing date, with an issue size equal to or in excess of $500 million. The fund charges 12 bps in fees and yields 2.57% annually.
PIMCO Broad U.S. TIPS ETF (TIPZ - Free Report) – Up 0.2% on Jan 29
The underlying ICE BofAML US Inflation-Linked Treasury Index comprises of U.S. Treasury Inflation Protected Securities with at least $1 billion in outstanding face value. The fund charges 20 bps and yields 1.63% annually.
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TIPS ETFs Likely to Benefit From Fed Meeting
The Federal Reserve stayed put on its interest rate policy on Jan 29, after three rate cuts in 2019. It also hinted at keeping interest rates unchanged in 2020 unless there is any drastic change in the economic outlook. The central bank has kept the benchmark interest rates at the band of 1.50-1.75%. The Federal Reserve put stress on the importance of raising inflation to officials’ target.
The Fed has acknowledged the strength of the U.S. job market while raised concerns about the new coronavirus from China. Fed chair Powell indicated that the coronavirus outbreak is “a significant thing which will have some effects on the Chinese economy, at least in the short term.” The World Health Organization plans to reconsider whether the new virus outbreak from China should be seen as a global pandemic.
Great Time for TIPS ETFs?
TIPS offers 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 principal amount and interest payments will keep on increasing with rising consumer prices.
This mechanism may make TIPS ETFs an investors’ darling in the coming days as the U.S. central bank affirms commitment to higher inflation. The Fed committee tried to notify that their policy is inclined to “inflation returning to the Committee’s symmetric 2 percent objective.”
Investors should note that in recent months, Fed officials have expressed concerns about their incapability to get inflation to the 2% level. So, the latest dialogue appears confirmatory of the pickup in U.S. inflation (read: 6 Sector ETFs & Stocks to Watch on December U.S. Inflation).
Though the expected trend of inflation depends a lot on the movement of energy prices (which are likely to be depressed due to the coronavirus outbreak), 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 (read: Virus Scare Weighs on Oil ETFs: Go Short for the Near Term).
Along with rising inflation expectations, the coronavirus event should bode well for bond ETFs as a whole as the safe-haven rally has dragged down the treasury yields (read: Don't Panic About Virus, Buy 5 Beaten-Down Top-Ranked ETFs).
TIPS ETFs in Focus
Below we highlight a few TIPS ETFs that are hovering around a one-month high at the current level.
15+ Year US TIPS Index ETF Pimco (LTPZ - Free Report) – Up 0.9% on Jan 29
The underlying ICE BofAML 15+ Year US Inflation-Linked Treasury Index comprises of U.S. Treasury Inflation Protected Securities with at least $1 billion in outstanding face value and a remaining term to final maturity greater than 15 years. It charges 20 bps in fees and yields 1.66% annually.
Schwab U.S. TIPS ETF (SCHP - Free Report) – Up 0.4% on Jan 29
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 and yields 1.99% annually (read: Low-Beta ETFs to Tap Amid Stock Market Selloff).
SPDR Portfolio TIPS ETF (SPIP - Free Report) – Up 0.4% on Jan 29
The underlying Bloomberg Barclays U.S. Government Inflation-linked Bond Index includes publicly issued, U.S. Treasury inflation protected securities that have at least one year remaining to maturity on index rebalancing date, with an issue size equal to or in excess of $500 million. The fund charges 12 bps in fees and yields 2.57% annually.
PIMCO Broad U.S. TIPS ETF (TIPZ - Free Report) – Up 0.2% on Jan 29
The underlying ICE BofAML US Inflation-Linked Treasury Index comprises of U.S. Treasury Inflation Protected Securities with at least $1 billion in outstanding face value. The fund charges 20 bps and yields 1.63% annually.
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 >>