Short-Duration TIPS ETFs Limit Rising-Rate Damage

ETF Trends

Tame inflation and rising interest rates have been tough on bond ETFs that invest in Treasury Inflation Protected Securities, or TIPS.

However, investors who want an inflation hedge with some protection from the negative impact of rising rates can consider TIPS ETFs with shorter durations.

“Thanks to several years of historically low rates, funds like  iShares Barclays TIPS Bond (TIP) have been the most popular exchange-traded way to invest in Treasury Inflation-Protected Securities. However, with rates increasing and subdued inflation expectations, long-duration ETFs like TIP may no longer be the best choice for most investors,” writes Abby Woodham, an ETF analyst at Morningstar, in a commentary posted on the firm’s website Wednesday.

“Broad TIPS ETFs such as TIP are highly sensitive to interest-rate changes, are a poor inflation hedge, and protect against unexpected inflation over a time period that might be too long for most,” she added. “Investors worried about rising rates should consider targeting the short end of the curve instead. Shorter-duration TIPS funds are less exposed to interest-rate risk, and are also slightly more correlated to inflation than their longer-dated brethren.”

ETFs in this category include Vanguard Short-Term Inflation-Protected Securities ETF (VTIP), PIMCO 1-5 Year US TIPS Index ETF (STPZ), iShares Barclays 0-5 Year TIPS Bond (STIP), FlexShares iBoxx 5Yr Target Duration TIPS ETF (TDTF) and  FlexShares iBoxx 3Yr Target Duration TIPS ETF (TDTT).

“With rates on the rise, investors are increasingly shifting their fixed-income assets into high-quality, shorter-duration bonds. TIPS should be no exception,” Woodham notes. [TIPS ETFs Hit by ‘Perfect Storm’ of Tame Inflation, Rising Rates]

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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