Best TIPS ETFs for Q4 2022

STIP, VTIP, and PBTP are the best TIPS ETFs for Q4 2022

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 does the principal amount of the security and the associated interest payments.

Key Takeaways

  • U.S. Treasury inflation-protected securities (TIPS) have underperformed the broader equity market over the past year.
  • Exchange-traded funds (ETFs) that invest in TIPS and have the best one-year trailing total returns are STIP, VTIP, and PBTP.
  • The top holdings of these ETFs are TIPS, which offer protection against the erosion of purchasing power due to inflation.

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 indicates how much inflation is anticipated by investors. The 10-year TIPS spread is 2.46% as of Aug. 17, 2022. This means that 10-year TIPS have a yield 2.46% lower than the 10-year Treasury, so inflation would need to average 2.46% per year for the two to have the same returns.

TIPS funds experienced record inflows in 2021 as investors grew increasingly concerned about long-term inflation. The key drivers of rising prices have included massive government spending, the economy's ongoing recovery, and supply chain disruptions related to the pandemic. TIPS ETFs enable investors to safeguard the value of their portfolios by mitigating the erosion of purchasing power caused by inflation.

However, inflation-protected bond funds have been experiencing large outflows this year as the Federal Reserve takes a more aggressive stance against inflation. The Fed raised rates numerous times in recent months, including by 75 basis points in July, in the face of rampant inflation. Higher interest rates and slowing inflation would make TIPS less attractive investments.

In an inflationary environment, bond yields tend to rise as investors demand an additional risk premium for higher inflation. This means that already-issued bonds that are not indexed to inflation become less attractive to investors compared to newer issues carrying higher interest rates and hence higher yields. Note that bond yields and prices are inversely related, meaning that if bond yields are rising due to higher inflation expectations, for example, then bond prices are falling.

There are 16 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 US TIPS Index, have underperformed the broader equity market. The index has provided a total return of -4.7% over the past 12 months compared with the S&P 500's total return of -3.0%, as of Aug. 16, 2022. The best-performing TIPS ETF, based on performance over the past year, is the iShares 0-5 Year TIPS Bond ETF (STIP).

We examine the three best TIPS ETFs below. All numbers are as of Aug. 17, 2022. In order to focus on the funds' investment strategy, the top holdings listed for each ETF exclude cash holdings and holdings purchased with securities lending proceeds except under unusual cases, such as when the cash portion is exceptionally large.

iShares 0-5 Year TIPS Bond ETF (STIP)

  • Performance Over One Year: 0.9%
  • Expense Ratio: 0.03%
  • Annual Dividend Yield: 3.88%
  • Three-Month Average Daily Volume: 1,427,469
  • Assets Under Management: $12.7 billion
  • Inception Date: Dec. 1, 2010
  • Issuer: BlackRock Financial Management

STIP seeks to track the Bloomberg U.S. Treasury Inflation-Protected Securities (TIPS) 0-5 Years Index (Series-L), which is composed of TIPS with remaining maturities of less than five years. The ETF provides exposure to short-dated TIPS. The shorter time to maturity of these securities means lower risk faced by investors, but it also means lower yields than longer-dated securities. The fund allocates approximately 40.7% of its total assets to TIPS with maturities of between 3-5 years. The next largest allocation, at about 25.6%, is TIPS with maturities between 2-3 years. STIP's top three holdings are three different sets of TIPS maturing in April 2025, April 2023, and January 2023, respectively.

Vanguard Short-Term Inflation-Protected Securities ETF (VTIP)

  • Performance Over One Year: 0.8%
  • Expense Ratio: 0.04%
  • Annual Dividend Yield: 3.40%
  • Three-Month Average Daily Volume: 3,410,267
  • Assets Under Management: $20.8 billion
  • Inception Date: Oct. 12, 2012
  • Issuer: Vanguard

Like STIP above, VTIP also aims to track the Bloomberg U.S. Treasury Inflation-Protected Securities (TIPS) 0-5 Years Index. The ETF's exposure to TIPS with relatively shorter maturities offers investors some protection against the possibility of sustained increases in interest rates compared to TIPS with longer maturities. However, that protection comes at the cost of generally lower returns. About 23.3% of the fund's assets are invested in TIPS with maturities between 2-3 years. The next largest allocation, at about 22.3%, is in TIPS with maturities between 4-5 years. VTIP's top three holdings are three different sets of TIPS maturing in January 2023, July 2023, and January 2024.

Invesco PureBeta 0-5 Yr US TIPS ETF (PBTP)

  • Performance Over One Year: 0.8%
  • Expense Ratio: 0.07%
  • Annual Dividend Yield: 2.64%
  • Three-Month Average Daily Volume: 63,947
  • Assets Under Management: $126.8 million
  • Inception Date: Sept. 22, 2017
  • Issuer: Invesco

Like STIP and VTIP above, PBTP also focuses on TIPS with maturities in the 0-5 year range. However, it tracks a different index: the ICE BofAML 0-5 Year US Inflation-Linked Treasury Index, which comprises TIPS with remaining maturities from 1 month through 5 years. While the expense ratio for PBTP is low, it is not as low as either fund above. Given the lower returns generally associated with shorter maturities, an expense ratio that is even slightly higher can be a significant factor for investors. About 83% of PBTP's holdings are TIPS with maturities between 1-5 years, with the remainder TIPS with maturities under 1 year. The top holdings of PBTP are different sets of TIPS maturing in April 2023, January 2026, and July 2023.

The comments, opinions, and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or adopt any investment strategy. While we believe the information provided herein is reliable, we do not warrant its accuracy or completeness. The views and strategies described in our content may not be suitable for all investors. Because market and economic conditions are subject to rapid change, all comments, opinions, and analyses contained within our content are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment, or strategy.

Article Sources
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  2. Bloomberg. "Inflation-Focused ETFs Could Keep Pulling Record Cash Into 2022."

  3. Reuters. "Inflation-Protected Funds See Big Outflows After Feverish 2021."

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  7. iShares by BlackRock. "iShares 0-5 Year TIPS Bond ETF (STIP)."

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  9. Vanguard. "Short-Term Inflation-Protected Securities ETF (VTIP)."

  10. VettaFi. "Vanguard Short-Term Inflation-Protected Securities ETF (VTIP)."

  11. Invesco. "Invesco PureBeta 0-5 Yr US TIPS ETF."

  12. VettaFi. "PBTP: Invesco PureBeta 0-5 Yr US TIPS ETF."

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