PowerShares Launches Short-Term TIPS ETF

PowerShares launched a new fixed income fund focused on providing exposure to the Treasury inflation-protected bond space.

The PowerShares PureBeta 0-5 Yr US TIPS Portfolio PBTP tracks the BofA Merrill Lynch 0-5 year US inflation-linked Treasury index.

Fund Characteristics

The fund seeks to provide exposure to U.S. Treasury inflation-protected securities. It has AUM of $2.5 million and seeks to provide cheap exposure to bonds that safeguard investors from inflation. It charges 7 basis points as fee per year and holds 15 bonds in its portfolio. It bears less concentration risk as just over 3.8% is allocated to the top 10 holdings.

From a maturity perspective, the fund allocates 16.6% to 0-1 year bonds and 83.4% to 1-5 year bonds. From a credit-rating perspective, the fund has 100% allocated to AA rated bonds.

Inflation numbers are rebounding, thus increasing the appeal of TIPS ETFs. Moreover, in its September meet the Fed announced its plans of curtailing its $4.5 trillion balance sheet, beginning October, and also signaled a rate hike by the end of this year.

The fund targets the short end of the yield curve and thus bears less interest rate risk. However, if there is a steep rise in short-term rates, the fund’s performance might be impacted.

Competition

The fund faces a lot of competition from other TIPS bond funds in the space. Below we discuss a few ETFs that seek to provide exposure to the space (see all Inflation-Protected Bond ETFs here).

iShares TIPS Bond ETF (BK:TIP)

This fund focuses on providing exposure to TIPS, U.S. government bonds that adjusts its principal based on inflation numbers. It thus protects investors from unexpected increases in inflation.

It has AUM of $23.5 billion and charges a fee of 20 basis points a year. The fund has a weighted average maturity of 8.35 years, while it has an effective duration of 7.68 years. It has a dividend yield of 2.44%. TIP has returned 0.9% year to date but has lost 1.7% in a year (as of Sep 25, 2017).

Vanguard Short-Term Inflation-Protected Securities ETF (BK:TIP)

This ETF focuses on providing exposure to short-term TIPS, whose face value is indexed to inflation.

It has AUM of $21.7 billion and is a relatively cheaper bet as it charges a fee of 7 basis points a year. The fund has an average effective maturity of 2.8 years and an average duration of 2.8 years as well. It has a dividend yield of 0.76%. VTIP has returned 0.7% year to date and remained flat in a year (as of Sep 25, 2017).

Schwab U.S. TIPS ETF (SIX:SCHP)

This fund seeks to invest in TIPS and track the performance of Bloomberg Barclays (LON:BARC) U.S. Treasury Inflation Protected Securities (TIPS) Index.

It has AUM of $2.5 billion and is a cheaper bet as it charges a fee of 5 basis points a year. The fund has a weighted average maturity of 8.5 years and an effective duration of 7.8 years. It has a dividend yield of 2.10%. SCHP has returned 1.3% year to date but has lost 2.3% in a year (as of Sep 25, 2017).

FlexShares iBoxx 3-Year Target Duration TIPS Index Fund TDTT

This fund seeks to invest in inflation protected securities and track the performance of the iBoxx 3-Year Target Duration TIPS Index.

It has AUM of $2.1 billion and charges a fee of 20 basis points a year. The fund has a weighted average maturity of 3.12 years and a modified adjusted duration of 3.11 years. It has a dividend yield of 1.32%. TDTT lost 0.6% year to date and 0.9% in the last one year (as of Sep 25, 2017).

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