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 too does the principal amount of the security and the associated interest payments. TIPS ETFs enable investors to safeguard the value of their portfolios by mitigating against the erosion of purchasing power caused by inflation.
- TIPS have underperformed the broad equity market over the past year.
- The ETFs with the best 1-year trailing total return are LTPZ, IVOL, and TIP.
- Each of these ETFs hold TIPS of various maturities.
There are about 13 distinct TIPS ETFs, 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 Barclays U.S. Treasury Inflation-Linked Bond Index (Series-L), have underperformed the broader market with a total return of 9.0% over the past 12 months compared to the S&P 500's total return of 22.9%, as of September 1, 2020. The best TIPS ETF, based on performance over the past year, is the PIMCO 15+ Year U.S. TIPS Index Fund (LTPZ). We examine the top 3 TIPS ETFs below. All numbers below are as of September 2, 2020.
- Performance over 1-Year: 18.1%
- Expense Ratio: 0.20%
- Annual Dividend Yield: 1.51%
- 3-Month Average Daily Volume: 162,876
- Assets Under Management: $576.3 million
- Inception Date: September 3, 2009
- Issuer: PIMCO
LTPZ tracks the BofA Merrill Lynch 15+ Year U.S. Inflation-Linked Treasury Index, which is comprised of TIPS with at least $1 billion in outstanding face value and a remaining term to final maturity equal to or greater than 15 years. The ETF's focus on longer-dated TIPS means higher yields compared to shorter-dated securities, but it also adds increased interest rate risk. This fund still may appeal to investors looking for protection against inflation.
- Performance over 1-Year: 10.8%
- Expense Ratio: 0.99%
- Annual Dividend Yield: 3.59%
- 3-Month Average Daily Volume: 349,459
- Assets Under Management: $500.5 million
- Inception Date: May 13, 2019
- Issuer: Quadratic Capital
IVOL is designed to provide investors with purchasing-power protection, inflation-risk mitigation, and inflation-protected income. It also seeks to profit from increases in volatility and a steepening of the yield curve. This ETF gains exposure to TIPS by investing in another ETF, the Schwab U.S. TIPS ETF (SCHP). SCHP aims to track the total return of the Bloomberg Barclays U.S. Treasury Inflation-Linked Bond Index (Series-L). IVOL also utilizes over-the-counter (OTC) fixed income options to take a long position in interest rate volatility.
- Performance over 1-Year: 9.0%
- Expense Ratio: 0.19%
- Annual Dividend Yield: 0.86%
- 3-Month Average Daily Volume: 1,695,279
- Assets Under Management: $23.8 billion
- Inception Date: December 4, 2003
- Issuer: iShares
TIP tracks the Barclays Capital U.S. Treasury Inflation Protected Securities Index (Series-L). The index is comprised of TIPS with at least one year remaining to maturity, have an investment grade rating, and have at least $250 million of outstanding face value. This ETF holds TIPS of various maturities and is considered relatively low risk. While investors may receive only a small yield, the fund is liquid and fairly cost-competitive.