U.S. Markets closed

TIPS ETF Lower After May CPI Decline

tlydon@globaltrend.com (Tom Lydon)

A popular exchange traded fund that invests in Treasury Inflation-Protected Securities was slightly lower Thursday after the Labor Department said consumer prices fell 0.3% in May, the largest decline in three years.

The $23 billion iShares Barclays TIPS Bond Fund (TIP - News) was down 0.2% at last check.

The May CPI decline was larger than economists had expected and the biggest drop since 2008, according to Bloomberg News. However, core inflation excluding food and energy rose 0.2% for a third month.

“The drop in the headline is encouraging for the Fed because it shows gasoline prices are less of strain on consumers’ incomes, which means they can pick up spending in the summer months,” said Jeffrey Greenberg, an economist at Nomura Securities International, in the report. “Unemployment is the Fed’s big concern. They aren’t worried about inflation going out of control.”

The Federal Reserve meets next week and investors are speculating on the odds of further quantitative easing from the central bank. [Gold ETFs Regain $1,600 as Markets Eye Spain, Fed]

Some investors are looking beyond gold and commodities for inflation protection to TIPS.

“TIPS … have been a popular investment lately, even as upward pressure on consumer prices has moderated,” The Wall Street Journal reported recently. “Some fear the Federal Reserve won’t be able to contain inflation over the long run after its unprecedented bond-buying programs have flooded the economy with cheap money.”

Demand for TIPS has been strong even though the bonds have negative yields. [Inflation Protection: TIPS ETFs are New Safe Haven]

Investors added $638 million to iShares Barclays TIPS Bond Fund last month.

With TIPS, the bonds’ principal is linked to changes in the CPI

However, it’s important to remember that since the ETFs invest in Treasury bonds, they can be hurt by rising yields.

“TIPS will not perform well if real yields rise along with rising interest rates,” said Russ Koesterich, iShares chief investment strategist. [Investors Buying TIPS ETF for Inflation Protection]

Other ETFs for this asset class include PIMCO 1-5 Year TIPS (STPZ - News) , SPDR Barclays Capital TIPS (NYSEArca: IPE) and Schwab U.S. TIPS (SCHP - News).

iShares Barclays TIPS Bond Fund

Full disclosure: Tom Lydon’s clients own TIP.