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Hedge Against U.S. Inflation With 5 TIPS ETFs

Sanghamitra Saha
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Inflation in several developed economies is firming up, including in the United States. Consumer prices in the United States grew rose 2.9% year over year in June 2018, in line with market expectations and above May’s reading of 2.8%. Higher oil prices kept inflation steady. The data marked the highest rate since February 2012.

Year-on-year, prices rose faster for fuel oil (30.8% from 25.3% in May), gasoline (24.3% from 21.8%); medical care services (2.5% from 2.3%) and food (1.4% from 1.2%), per tradingeconomics.  If we take food and energy prices off, annual inflation was up 2.3%. 

Inflation to Pick Up Further?

President Trump’s plans and measures for fiscal reflation makes us hopeful of further wave of inflation. If this was not enough, Trump’s enactment of import tariffs on a host of goods is likely to push up inflation. Levy of import duties will lead those affected companies to pass on the price hikes to consumers (read: Will Consumer ETFs Lose Momentum on Trump Tariffs?).

Per an article published on chicagotribune, Trump levied a 20% tariff on foreign washing machines earlier this year, and the latest inflation report showed more than a 13% uptick in laundry equipment over the same period last year. Per the chief investment officer of Bleakley Advisory Group, rising transportation costs is around the corner “along with the tariff induced jump in costs."

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 (read: Forget Inflation Fears with These TIPS ETFs).

This mechanism has made TIPS ETFs investors’ darlings in recent times as they are increasingly wagering on inflation-protected bond funds. Though the expected trend of inflation depends a lot on the movement of energy prices, investors with a long-term view can count on the potential uptick in inflation as the U.S. economic backdrop remains robust.

Below we highlight a few TIPS ETFs that could be compelling investments, if U.S. inflation continues to scale higher (see: all TIPS ETFs here):

PIMCO 15+ Year US TIPS Index Fund LTPZ – Up 0.53%

The fund comprises U.S. TIPS with at least $1 billion in outstanding face value and a remaining term to final maturity greater than 15 years. Effective maturity of the fund is 25.11 years and effective duration is 21.93 years. It yields 2.76% annually and charges 20 bps in fees.

FlexShares iBoxx 5-Year Target Duration TIPS Index Fund TDTF – Up 0.28%

The fund’s objective is to target a modified adjusted duration of 5.0 years and define the eligible universe of TIPS as having no less than three years and no more than 20 years until maturity.It yields about 2.53% annually and charges 18 bps in fees. Weighted average maturity is 7.60 years and modified adjusted duration is 4.83 years.

iShares TIPS Bond ETF TIP – Up 0.20% on Jul 13

The fund’s effective duration is 7.65 years and weighted average maturity is 8.33 years. It yields about 2.62% annually and charges 20 bps in fees. Bonds with maturity of 7-10 years take the highest share of the fund with about 30% exposure.

SPDR Barclays Capital TIPS ETF IPE – Up 0.20% on Jul 13

The fund gives exposure to publicly issued, U.S. TIPS that have at least one year remaining to maturity on an index rebalancing date. It yields 3.41% annually and charges 15 bps in fees. Its option adjusted duration is 6.30 years and average maturity is 9.03 years (read: Rising Inflation Fuels Demand for TIPS ETFs).

Schwab U.S. TIPS ETF SCHP – Up 0.18% on Jul 13

Weighted average maturity of the fund is 8.2 years while effective duration is 7.5 years. It yields 2.41% and charges 5 bps in fees.

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ISHARS-TIPS BD (TIP): ETF Research Reports
 
SPDR-BBC TIPS (IPE): ETF Research Reports
 
PIMCO-15+Y TIPS (LTPZ): ETF Research Reports
 
SCHWAB-US TIPS (SCHP): ETF Research Reports
 
FLEXS-IB 5Y TAR (TDTF): ETF Research Reports
 
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