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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 as of Dec. 1, 2021, is 2.44%. This means that 10-year TIPS have a yield 2.44% lower than the 10-year Treasury, so inflation would need to average 2.44% per year for the two to have the same returns.
TIPS funds have experienced rising inflows this year, as accelerating price increases spark investor fears about inflation amid the economy’s ongoing recovery. TIPS ETFs enable investors to safeguard the value of their portfolios by mitigating against the erosion of purchasing power caused by inflation.
- U.S. Treasury inflation-protected securities (TIPS) have dramatically 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 LTPZ, SPIP, and GTIP.
- The top holdings of these ETFS are TIPS, which offer protection against the erosion of purchasing power due to inflation.
There are 15 distinct TIPS ETFs that trade in the United States, 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 significantly underperformed the broader market. They have a total return of 6.8% over the past 12 months compared to the S&P 500’s total return of 27.9%, as of Nov. 30, 2021. The best-performing TIPS ETF, based on performance over the past year, is the PIMCO 15+ Year US TIPS Index ETF (LTPZ). We examine the three best TIPS ETFs below. All numbers below are as of Nov. 30, 2021.
- Performance Over One-Year: 8.4%
- Expense Ratio: 0.20%
- Annual Dividend Yield: 3.22%
- Three-Month Average Daily Volume: 135,000
- Assets Under Management: $954.9 million
- Inception Date: Sept. 3, 2009
- Issuer: Allianz Investment Management LLC
LTPZ seeks to track the ICE BofA Merrill Lynch 15+ Year US Inflation-Linked Treasury Index, which is comprised of TIPS with maturities that are 15 years or greater. The ETF aims to help investors preserve the purchasing power of their money against inflation while also offering low default risk. The longer maturity of the securities held means there is greater potential for higher returns than a fund comprised of lower-maturity securities, but it also increases risk due to greater exposure to changes in interest rates. Its top three holdings are three different sets of TIPS maturing in 2044, 2041, and 2042, respectively.
- Performance Over One-Year: 6.8%
- Expense Ratio: 0.12%
- Annual Dividend Yield: 4.18%
- Three-Month Average Daily Volume: 1,254,632
- Assets Under Management: $3.5 billion
- Inception Date: May 25, 2007
- Issuer: State Street
SPIP aims to track the performance of the Bloomberg U.S. Government Inflation-Linked Bond Index, which is comprised of TIPS having at least 1 year remaining to maturity on the index’s rebalancing date and the size of the issue must be for an amount equal to or greater than $500 million. The ETF is designed to offer a low-cost way for investors to protect their wealth against the corrosive effects of inflation. The average maturity of the securities that comprise the fund is approximately 8.8 years. The fund’s top three holdings are three different sets of TIPS maturing in 2026, 2023, and 2024, respectively.
- Performance Over One-Year: 6.8%
- Expense Ratio: 0.12%
- Annual Dividend Yield: 3.46%
- Three-Month Average Daily Volume: 30,189
- Assets Under Management: $190.5 million
- Inception Date: Oct. 2, 2018
- Issuer: Goldman Sachs
GTIP seeks to track the performance of the FTSE Goldman Sachs Treasury Inflation Protected USD Bond Index, which provides exposure to TIPS meeting certain liquidity and seasoning criteria. The ETF employs a strategy of investing in so-called “off-the-run” securities, which tend to be traded less than newer issued “on-the-run” securities. The lower demand for the less-traded, “off-the-run” securities tends to make them cheaper than their “on-the-run” counterparts. Like the other two funds above, GTIP is comprised of TIPS, thus offering investors a way to protect against the erosion of purchasing power due to inflation. Its top three holdings are three different sets of TIPS maturing in 2028, 2027, and 2025, respectively.
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