This article was originally published on ETFTrends.com.
As fixed-income investors looked backed into Treasury exposure, some bond investors are taking a shine to a Treasury inflation protected securities-related exchange traded fund to generate yield generation and hedge against potential inflationary risks in a growing economic environment.
The Schwab U.S. TIPS (SCHP) was the most popular ETF of the past week, attracting $1.2 billion in net inflows, according to XTF data. SCHP is also the cheapest TIPS-related ETF on the block with a 0.05% expense ratio.
The rush toward Treasuries and TIPS may be attributed to the sudden risk-off nature in response to Eurozone risks, namely Italy's recent election results and rising anti-establishment or anti-euro sentiment that has fueled speculation of a potential dissolution of the euro currency bloc.
“It’s definitely a flight to safety,” Aaron Clark, portfolio manager at Boston-based GW&K Investment Management, told Bloomberg. “Some memories are fresh with Greece and the issues that Europe was having in general, and the U.S. is always a sort of quality trade in scenarios like that.”
Treasury Bonds That Shield Against Inflation
TIPS are a type of Treasury security that are indexed to inflation as a way to shield investors from the negative effects of inflation. The securities’ par value rises with inflation as measured by the Consumer Price Index while interest rate remains fixed. TIPS also offer investors another layer of diversification as many aggregate bond funds exclude TIPS from their holdings.
Investors will typically look at TIPS ahead of an inflationary period since buying TIPS after inflation has gone up means that the security has already priced in the inflation and investors would likely be overpaying for the TIPS exposure.
Inflation remained at the Federal Reserve’s target in April for a second straight month, signalling firming prices in the U.S. economy, the Wall Street Journal reported. Personal-consumption expenditures price index, a broad measure that serves as the Fed’s preferred inflation gauge, inched up a seasonally adjusted 0.2% in April from March. The index was up 2% year-over-year, matching the Fed’s annual inflation target.
For more information on Treasury inflation protected securities, visit our TIPS category.
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