Dull CPI, Rising Rates Have Inflation-Indexed ETFs Seeing Red

ETF Trends

Inflation remains subdued in the U.S. with consumer prices rising just 0.1% in August, a bit lower than economists had expected. A combination of tame inflation and rising interest rates has been tough on ETFs that track Treasury Inflation Protected Securities, or TIPS.

TIPS have grown popular in recent years as an alternative to gold and commodities to hedge inflation as central banks print money after the financial crisis.

However, U.S. consumer prices are barely rising. [Short-Duration TIPS ETFs Limit Rising-Rate Damage]

“The overall CPI and the core reading climbed 1.5% and 1.8%, respectively, over the last 12 months that ended in August, staying within the Federal Reserve’s target for inflation,” The International Business Times reports.

The iShares TIPS Bond ETF (TIP) is down 8.5% year to date, according to Morningstar.

The value of TIPS is indexed to the Consumer Price Index. However, TIPS are sensitive to interest rates like nominal Treasury bonds, so their prices can fall when yields rise. Therefore, the worst possible market for TIPS is when interest rates are rising faster than inflation. [TIPS ETFs Hit by ‘Perfect Storm’]

iShares TIPS Bond ETF

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Full disclosure: Tom Lydon’s clients own TIP.

The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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