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 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 also indicates how much inflation investors anticipate. 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 broader equity market over the past year.
- The ETFs with the best 1-year trailing total return are LTPZ, IVOL, and SPIP.
- Each of these ETFs hold TIPS of various maturities.
There are 13 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 Barclays U.S. Treasury Inflation-Linked Bond Index (Series-L), have underperformed the broader market with a total return of 9.6% over the past 12 months compared to the Russell 1000's total return of 19.5%, as of November 27, 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. Each of these funds holds TIPS of various maturities, either directly or through other investments. All numbers below are as of November 30, 2020.
- Performance over 1-Year: 20.9%
- Expense Ratio: 0.20%
- Annual Dividend Yield: 1.97%
- 3-Month Average Daily Volume: 94,006
- Assets Under Management: $715.1 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: 11.9%
- Expense Ratio: 0.99%
- Annual Dividend Yield: 3.69%
- 3-Month Average Daily Volume: 444,414
- Assets Under Management: $821.6 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). IVOL also utilizes over-the-counter (OTC) fixed income options.
- Performance over 1-Year: 10.0%
- Expense Ratio: 0.12%
- Annual Dividend Yield: 2.17%
- 3-Month Average Daily Volume: 449,114
- Assets Under Management: $2.1 billion
- Inception Date: May 25, 2007
- Issuer: State Street SPDR
SPIP tracks the Bloomberg Barclays US Government Inflation-Linked Bond Index, which includes TIPS with at least 1 year remaining to maturity and with a size of at least $500 million. As one of SPDR's low-cost core Portfolio ETFs, SPIP aims to be one component of a broad, diversified investment approach to core asset classes. SPIP is typically utilized as a hedge against the decline of purchasing power as a result of inflation.
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