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. The 10-year TIPS spread as of May 18, 2021 is 2.52%. This means that 10-year TIPS have a yield 2.52% lower than the 10-year Treasury, so inflation would need to average 2.52% per year for the two to have the same returns. TIPS funds currently are experiencing rising inflows 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.
- TIPS have dramatically underperformed the broader equity market over the past year.
- The ETFs with the best 1-year trailing total return are WIP, IVOL, and TDTF.
- Each of these ETFs hold TIPS or non-U.S. inflation-linked bonds, either directly or through other ETFs.
There are 14 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 US TIPS (Series-L) Index, have significantly underperformed the broader market with a total return of 7.4% over the past 12 months compared to the S&P 500's total return of 42.0%, as of May 18, 2021. The best-performing TIPS ETF, based on performance over the past year, is the SPDR FTSE International Government Inflation-Protected Bond ETF (WIP). We examine the top 3 best TIPS ETFs below. All numbers below are as of May 19, 2021.
- Performance over 1-Year: 17.7%
- Expense Ratio: 0.50%
- Annual Dividend Yield: 2.19%
- 3-Month Average Daily Volume: 41,983
- Assets Under Management: $399.9 million
- Inception Date: March 13, 2008
- Issuer: State Street
WIP tracks the FTSE International Inflation-Linked Securities Select Index, which is designed to gauge the performance of inflation-linked bonds outside the U.S. The ETF provides investors with a way to protect the purchasing power of their savings from inflation in non-U.S. developed and emerging market countries. The country whose inflation-linked securities receive the largest allocation in the fund is the U.K., followed by France and Brazil. The fund's top holdings include inflation-linked securities issued by the German government and two sets of inflation-linked gilts issued by the U.K. government.
- Performance over 1-Year: 11.3%
- Expense Ratio: 0.99%
- Annual Dividend Yield: 3.45%
- 3-Month Average Daily Volume: 1,725,854
- Assets Under Management: $3.0 billion
- Inception Date: May 13, 2019
- Issuer: CICC
IVOL is designed to hedge against interest rate volatility, a steepening yield curve, and inflation. It seeks to protect investors against the loss of purchasing power while providing opportunities to profit from changes in interest rates. The fund gains its main exposure to TIPS by investing in another ETF, the Schwab U.S. TIPS ETF (SCHP). But it also utilizes options in order to achieve its investment objectives.
- Performance over 1-Year: 8.5%
- Expense Ratio: 0.18%
- Annual Dividend Yield: 1.34%
- 3-Month Average Daily Volume: 69,233
- Assets Under Management: $611.4 million
- Inception Date: Sept. 19, 2011
- Issuer: Northern Trust
TDTF tracks the iBoxx 5-Year Target Duration Index, which is designed to measure the performance of TIPS targeting a modified adjusted duration of 5 years as well as TIPS with no less than one year and no more than ten years to maturity. The ETF provides protection against the corrosive effects of inflation as well as targeted duration exposure by investing in TIPS with an average duration of approximately five years. The fund can be used in either a buy-and-hold strategy or as a tactical play to shift allocation toward low-risk assets in anticipation of a sharp uptick in inflation.
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