Are TIPS ETFs The New Safe Haven?

Low volatility and high dividend funds come to our minds every time we hear the words ‘safe haven’. However, that does not seem to be the case in 2018, as the traditional safe haven funds are not living up to investor expectations of protecting them from the wrath of a market correction (read: Why Defensive ETFs Fail in the Market Downturn?).

U.S. markets recently suffered a sell-off owing to fears of rising rates. The S&P 500 entered correction territory, as it declined more than 10% from the record high set in January. Strong wage growth and jobs data introduced fears of inflation making a comeback and led investors to bet on aggressive rate hikes.

The Fed is expected to hike interest rates multiple times this year to tame inflation. Given this, markets are betting on the Fed to hike rates more than three times suggested earlier. Per the CME Fed Watch tool, there is a 71.9% chance of a 25 basis point rate hike in March. As a result, investors are eyeing Treasury Inflation Protected securities, to safeguard themselves from firm growth in consumer prices.

Into the Headlines

Consumer prices increased 2.1% year over year in January, unchanged from the previous month but above economists’ forecasts of 1.9%. Moreover, core inflation, which excludes prices of volatile items such as food and oil, increased 1.8% in January, also unchanged from December but above economists’ forecasts of 1.7%.

Peter Hooper, chief economist at Deutsche Bank, told Financial Times, “We were probably going to get an inflation overshoot at some point, and it’s now possible it is coming sooner than expected,” adding, “The risk is now that the Federal Reserve pencils in four rate hikes when it meets in March.”

For instance, etf.com data tells us that iShares TIPS Bond ETF (TIP) has witnessed $350.2 million in inflows in February so far. This is clearly a signal of how investors are reallocating their portfolios to reflect the changing circumstances.

Moreover, President Donald Trump’s tax reform and spending deal might add further pressure to prices. “The Fed’s task is complicated by the recent tax cuts and spending deal, which will stimulate the economy at a time when the labor market is already at, or close to, full employment,” Gus Faucher, chief economist at PNC Financial told Reuters.

Let us now discuss a few inflation-protected ETFs (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 $24.6 billion and charges a fee of 20 basis points a year. The fund has a weighted average maturity of 8.11 years and an effective duration of 7.43 years. TIP lost 2.2% year to date but has returned 0.2% in a year.

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 $4.8 billion and is a relatively cheaper bet as it charges a fee of 6 basis points a year. The fund has a weighted average maturity of 2.5 years and an effective duration of 2.5 years as well. VTIP has lost 0.5% year to date but has returned 0.1% in a year.

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 $3.0 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 8.3 years and an effective duration of 7.6 years. SCHP has lost 2.2% year to date but has returned 0.2% in a year.

FlexShares iBoxx 3-Year Target Duration TIPS Index Fund TDTT

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

It has AUM of $2.0 billion and charges a fee of 18 basis points a year. The fund has a weighted average maturity of 3.46 years and a modified adjusted duration of 3.02 years. TDTT has lost 0.7% year to date and 0.5% in a year.

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