State Street Introduces Short-Term TIPS Bond ETF

Zacks

Bond investments saw a lackluster 2013 due to the Fed’s taper concerns and towering equity markets. However, investors were caught off guard at the start of 2014 as equities lost some appeal following a faster QE taper and soft economic data points. Cautious investors started to seek more safety in their investments and flock to the fixed income segment of the investing world.

Investors should note that U.S. fixed income ETFs have gathered $14.63 billion year to date while equity ETFs bled $16.7 billion in aggregate so far. However, while investors seem enthusiastic about bond investing, rising rate concerns and the prospect of higher inflation are also looming large (read: 3 Bond ETFs Surging as Interest Rates Tumble).

Amid such a backdrop, State Street – one of the biggest ETF issuers in the world – has added a new member to its fund family, this time in the TIPS bond space. The fund hit the market on February 27 under the name of SPDR Barclays 0-5 Year TIPS ETF with the ticker of SIPE.

SIPE in Focus

This new fixed-income ETF looks to offer exposure to the Barclays 0-5 Year Government Inflation-linked Bond Index, which comprises publicly issued Treasury Inflation-Protected Securities (TIPS). The securities have maturities of less than one year to five years, and an issue size of at least $500 million. The fund charges 15 bps in fees per year from investors.

How does this fit in a portfolio?

The product hits the market at an opportune time when the demand for treasuries remains sky high. Some soft economic data, initiation of QE taper, worries about global growth and the resultant stock market volatility encouraged many investors to take a flight to safety. However, this ‘great un-rotation’ – from stocks back to bonds – also came at the cost of rising rates concern.

With the Fed seems steadfast in curtailing its massive monetary stimulus, rates are likely to rise in the coming days. Though higher demand for government bonds has presently kept the interest rates under control, the scenario is unlikely to persist when the bond buying spree bottoms out (read: 3 Bond ETFs Kick Off 2014 with Strong Inflows).

Amid such a situation, investors looking for a fixed-income play should consider investing in SIPE. The product has been planned to slash interest rate risks in bond investing as its short-duration profile will provide a cushion against rising rates.

Also, TIPS offer robust real returns during inflationary periods, unlike their unprotected peers in the fixed income world. The Fed’s firm stance toward a scaled back QE affirms the continued U.S. economic recovery and with the economy gaining strength, inflation is bound to increase at some point in time.

In fact, inflation expectation recently hit an eight-month high in the U.S. Thus, rising inflation has explained the need for the launch of this TIPS bond (read: Fight Inflation with these TIPS ETFs).  

Future Competition

The TIPS bond ETF space is actually overcrowded with issuers offering products across the maturity spectrum. State Street itself owns a product called SPDR Barclays Capital TIPS ETF (IPE) having real modified duration of 8.25 years (read: State Street Launches TIPS and Global Dividend ETFs).

As of now, the space is dominated by iShares Barclays TIPS Bond ETF (TIP) which has amassed $12.5 billion in assets though it targets the longer end of the yield curve and charges about 20 bps in fees.

FlexShares iBoxx 3-Year Target Duration TIPS Index Fund (TDTT) follows TIPS, having attracted about $2.0 billion in assets so far and focusing on the shorter end of the curve. TDTT also costs 20 bps. 

Clearly, the newly launched fund SIPE has to fight hard to garner investors’ money. SIPE will have to sell its “low expense ratio” criteria – which is considerably lower than the average fees charged by the other players – to stay afloat in the space.

Also, its “0 to 5” years of duration should be able to attract a good amount of investors’ attention given the potential rising rate environment in the U.S. and especially among investors who are worried about a further increase in interest rates.

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