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 February 26, 2021 is 2.15%. This means that 10-year TIPS have a yield 2.15% lower than the 10-year Treasury, so inflation would need to average 2.15% per year for the two to have the same returns. 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 IVOL, TDTF, and SCHP.
- Each of these ETFs holds TIPS of various maturities, 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 U.S. Treasury Inflation-Linked Bond Index (Series-L), have underperformed the broader market with a total return of 6.5% over the past 12 months compared to the S&P 500's total return of 24.5%, as of February 26, 2021. The best TIPS ETF, based on performance over the past year, is the Quadratic Interest Rate Volatility and Inflation Hedge ETF (IVOL). 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 March 1, 2021.
- Performance over 1-Year: 16.2%
- Expense Ratio: 0.99%
- Annual Dividend Yield: 3.50%
- 3-Month Average Daily Volume: 1,237,100
- Assets Under Management: $2.0 billion
- Inception Date: May 13, 2019
- Issuer: Quadratic Capital
IVOL is designed to hedge relative interest rate movements, whether they are falling short-term rates or rising long-term rates. It also seeks to profit from increases in fixed-income volatility and steepening of the yield curve. This ETF gains its main exposure to TIPS by investing in another ETF, the Schwab U.S. TIPS ETF (SCHP), which appears on our list below. IVOL also holds what it calls dynamically managed fixed-income options.
- Performance over 1-Year: 6.8%
- Expense Ratio: 0.18%
- Annual Dividend Yield: 1.14%
- 3-Month Average Daily Volume: 67,562
- Assets Under Management: $579.8 million
- Inception Date: September 19, 2011
- Issuer: FlexShares
TDTF tracks the iBoxx 5-Year Target Duration Index, an index composed of TIPS with an average duration of approximately 5 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. Investors should be aware that TDTF is a targeted tool used for a narrow part of the bond market.
- Performance over 1-Year: 6.3%
- Expense Ratio: 0.05%
- Annual Dividend Yield: 1.14%
- 3-Month Average Daily Volume: 1,485,321
- Assets Under Management: $15.4 billion
- Inception Date: August 5, 2010
- Issuer: Charles Schwab
SCHP aims to track the Bloomberg Barclays US Treasury Inflation-Linked Bond Index (Series-L), a broad index encompassing a large portion of the TIPS market. Like other funds in this category, SCHP is commonly given increased weighting in a portfolio if investors are concerned about inflationary pressures. SCHP distinguishes itself from other general TIPS funds by its very low expense ratio.
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 to 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 on 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.