Exchange-traded funds (ETFs) that invest in U.S. Treasury inflation-protected securities (TIPS) present a convenient way for investors to gain exposure to these government-guaranteed fixed-income instruments. TIPS are Treasury securities indexed to inflation, meaning that when inflation rises, so does the principal amount of the security and the associated interest payments.
TIPS spread is an important related metric that shows the difference in yield between TIPS and regular U.S. Treasury securities with the same maturity. This shows how much people are willing to pay for inflation protection and indicates how much inflation is anticipated by investors. The 10-year TIPS spread is 2.87% as of May 5, 2022. This means that 10-year TIPS have a yield 2.87% lower than the 10-year Treasury, so inflation would need to average 2.87% per year for the two to have the same returns.
TIPS funds experienced record inflows in 2021 as investors grew increasingly concerned about long-term inflation. The key drivers of rising prices have included massive government spending, the economy’s ongoing recovery, and supply chain disruptions related to the pandemic. TIPS ETFs enable investors to safeguard the value of their portfolios by mitigating the erosion of purchasing power caused by inflation.
However, inflation-protected bond funds have been experiencing large outflows this year as the Federal Reserve takes a more aggressive stance against inflation. The Fed raised rates by half a percentage point on May 4, the biggest hike since 2000, as recent data show inflation running at a 40-year high. Higher interest rates and slowing inflation would make TIPS less attractive investments.
In an inflationary environment, bond yields tend to rise as investors demand an additional risk premium for higher inflation. This means that already-issued bonds that are not indexed to inflation become less attractive to investors compared to newer issues carrying higher interest rates and hence higher yields. Note that bond yields and prices are inversely related, meaning that if bond yields are rising due to higher inflation expectations, for example, then bond prices are falling.
Key Takeaways
- U.S. Treasury inflation-protected securities (TIPS) have underperformed the broader equity market over the past year.
- Exchange-traded funds (ETFs) that invest in TIPS and have the best one-year trailing total returns are RINF, STIP, and VTIP.
- The top holdings of these ETFs are TIPS, which offer protection against the erosion of purchasing power due to inflation.
There are 17 distinct TIPS ETFs that trade in the U.S., excluding inverse and leveraged ETFs as well as funds with less than $50 million in assets under management (AUM).
TIPS, as measured by the Bloomberg US TIPS Index, have underperformed the broader market. The index has provided a total return of -0.1% over the past 12 months compared with the S&P 500’s total return of 4.7%, as of May 4, 2022. The best-performing TIPS ETF, based on performance over the past year, is the ProShares Inflation Expectations ETF (RINF).
We examine the three best TIPS ETFs below. All numbers are as of May 5, 2022.
- Performance Over One-Year: 18.0%
- Expense Ratio: 0.30%
- Annual Dividend Yield: 2.62%
- Three-Month Average Daily Volume: 26,168
- Assets Under Management: $52.5 million
- Inception Date: Jan. 10, 2012
- Issuer: ProShares
RINF aims to track the FTSE 30-Year Tips (Treasury Rate-Hedged Index), which is designed to gauge the changes in breakeven inflation. The ETF takes both long and short positions in assets with similar durations. That unique approach enables the fund to strip out the effects associated with changes in interest rates, making the fund’s returns sensitive to changes in inflation expectations only. Higher inflation expectations will cause RINF to appreciate in value. The fund’s exposures consist of long positions in 30-Year TIPS yielding 0.125% and maturing in 2052 as well as short positions in standard U.S. Treasury Bonds yielding 2.75% and maturing in 2047.
- Performance Over One-Year: 2.1%
- Expense Ratio: 0.03%
- Annual Dividend Yield: 3.88%
- Three-Month Average Daily Volume: 1,551,362
- Assets Under Management: $11.9 billion
- Inception Date: Dec. 1, 2010
- Issuer: BlackRock Financial Management
STIP seeks to track the Bloomberg U.S. Treasury Inflation-Protected Securities (TIPS) 0-5 Years Index (Series-L), which is composed of TIPS with remaining maturities of less than five years. The ETF provides exposure to short-dated TIPS. The shorter time to maturity of these securities means lower risk faced by investors, but it also means lower yields than longer-dated securities. The fund allocates approximately 34% of its total assets to TIPS with maturities of between 3-5 years. The next largest allocation, at about 31%, are TIPS with maturities between 2-3 years. STIP’s top three holdings are three different sets of TIPS maturing in April 2025, April 2023, and October 2024, respectively.
- Performance Over One-Year: 1.9%
- Expense Ratio: 0.04%
- Annual Dividend Yield: 3.40%
- Three-Month Average Daily Volume: 4,449,721
- Assets Under Management: $20.7 billion
- Inception Date: Oct. 12, 2012
- Issuer: Vanguard
Like STIP above, VTIP also aims to track the Bloomberg U.S. Treasury Inflation-Protected Securities (TIPS) 0-5 Years Index. The ETF’s exposure to TIPS with relatively shorter maturities offers investors some protection against the possibility of sustained increases in interest rates compared to TIPS with longer maturities. However, that protection comes at the cost of generally lower returns. About 23% of the fund’s assets are invested in TIPS with maturities between 2-3 years. The next largest allocation, at about 22%, is in TIPS with maturities between 3-4 years. VTIP’s top three holdings are three different sets of TIPS maturing in January 2023, July 2023, and January 2024.
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