For investors concerned that inflation will remain high even with more Fed rate hikes and a recent moderation in prices, three top-performing ETFs offer exposure to U.S. Treasury inflation-protected securities (TIPS).
They are the iShares 0-5 Year TIPS Bond ETF, the Vanguard Short-Term Inflation-Protected Securities ETF, and the Invesco PureBeta 0-5 Yr US TIPS ETF. The TIPS are government-guaranteed fixed-income instruments indexed to inflation, which means their principal amount and associated interest payments rise along with inflation.
- The top-performing TIPS ETFs, ranked by one-year trailing total return, are the iShares 0-5 Year TIPS Bond ETF, the Vanguard Short-Term Inflation-Protected Securities ETF, and the Invesco PureBeta 0-5 Yr US TIPS ETF.
- U.S. Treasury inflation-protected securities (TIPS) have outperformed the broader market in the last year.
- The top holdings of these three ETFs are TIPS, which offer protection against the erosion of purchasing power due to inflation.
Rates of inflation have been at their highest in decades in recent months, although October prices didn't rise as fast as expected. The benchmark Bloomberg US TIPS Index has dropped 14% compared with a 19% decline in the S&P 500 Index over the last year as of Nov. 9.
We examine the three best TIPS ETFs below. All numbers are as of Nov. 10, 2022.
- Performance Over One Year: -2.8%
- Expense Ratio: 0.03%
- Annual Dividend Yield: 3.88%
- Three-Month Average Daily Volume: 1,515,362
- Assets Under Management: $12.5 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 38.0% of its total assets to TIPS with maturities of between 3-5 years. The next largest allocation, at about 22.5%, is TIPS with maturities between 2-3 years. STIP's top three holdings are three different sets of TIPS maturing in April 2025, January 2023, and April 2023, respectively.
- Performance Over One Year: -2.9%
- Expense Ratio: 0.04%
- Annual Dividend Yield: 3.40%
- Three-Month Average Daily Volume: 3,460,098
- Assets Under Management: $17.4 billion
- Inception Date: Oct. 12, 2012
- Issuer: Vanguard
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. As of Sept. 30, about 23.3% of the fund's assets are invested in TIPS with maturities between 2-3 years. The next largest allocation, at about 21.6%, 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.
- Performance Over One Year: -3.0%
- Expense Ratio: 0.07%
- Annual Dividend Yield: 2.64%
- Three-Month Average Daily Volume: 69,600
- Assets Under Management: $122.2 million
- Inception Date: Sept. 22, 2017
- Issuer: Invesco
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 isn't as low as either fund above. Given the lower returns generally associated with shorter maturities, an expense ratio that's 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 2023, and July 2023.
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