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 Aug. 17, 2021 is 2.33%. This means that 10-year TIPS have a yield 2.33% lower than the 10-year Treasury, so inflation would need to average 2.33% per year for the two to have the same returns. TIPS funds have recently experienced 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.
The ETFs with the best 1-year trailing total return are WIP, TDTF, and SCHP.
Each of these ETFs holds TIPS or non-U.S. inflation-linked bonds of various maturities.
There are 14 distinct TIPS ETFs that trade in the U.S., excluding inverse and leveraged ETFs and 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 6.9% over the past 12 months compared to the S&P 500’s total return of 34.9%, as of Aug. 16, 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 Aug. 16, 2021.
Performance over 1-Year: 7.6%
Expense Ratio: 0.50%
Annual Dividend Yield: 3.17%
3-Month Average Daily Volume: 34,420
Assets Under Management: $442.9 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, inflation-linked securities issued by the Spanish government, and a set of inflation-linked gilts issued by the U.K.
Performance over 1-Year: 6.8%
Expense Ratio: 0.18%
Annual Dividend Yield: 3.22%
3-Month Average Daily Volume: 108,709
Assets Under Management: $664.6 million
Inception Date: Sep. 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. The fund’s top holdings are U.S. Treasury notes.
Performance over 1-Year: 6.4%
Expense Ratio: 0.05%
Annual Dividend Yield: 3.02%
3-Month Average Daily Volume: 2,440,878
Assets Under Management: $19.1 billion
Inception Date: Aug. 5, 2010
Issuer: Charles Schwab
SCHP tracks the Bloomberg Barclays US Treasury Inflation-Linked Bond Index (Series-L), an index comprised of inflation-protected U.S. Treasury securities. SCHP invests in the overall maturity spectrum of this market, giving it a wider scope than some alternative ETFs. Another factor setting SCHP apart is its relatively low expense ratio, providing low-cost tax-efficiency potential in a diversified portfolio. The fund’s top holdings include U.S. Treasury notes and bonds of various maturities.
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