Industry Updates

Investors eye TIPS ETFs on inflation spike fears

A ‘tempting’ diversification play

Theo Andrew

Inflation graph markets US Dollar

Fund selectors wary of stubborn inflation have been piling into inflation-protection ETFs since the turn of the year.

Rising tensions in the Middle East along with the recent strong-than-expected US inflation reading has awoken fears that recent deflationary trends could be transitory.

As a result, the iShares $ TIPS UCITS ETF (ITPS) has recorded inflows of $440m this year, according to data from Bloomberg Intelligence, as at 19 January.

US inflation rose to 3.4% last December, ahead of 3.2% forecasts, while the country’s economic data continues to beat expectations.

The last mile of disinflation – from 4% to the Federal Reserve’s 2% target – is historically the most challenging and has generally been achieved following a recession.

A recent JP Morgan note forecast inflation to come in at 3% during the first half of the year, adding there are reasons to be cautious with most of last year's deflationary trends abating.

“Commodity prices are no longer falling and traded good prices point to a moderating deflationary impulse from China,” Bruce Kasman, managing director and chief economist at JP Morgan said.

“The recent disruptions in Red Sea trade could add as much as 0.7% to annualised global core goods inflation.”

The investor view

Stephen Kemper, chief investment strategist, team advisory desk at BNP Paribas Wealth Management, said inflation-protection ETFs could be a tempting diversification play given current inflationary factors and the prevailing ‘higher for longer’ interest rate narrative. 

“Investors could look to inflation protection, particularly in the US, which could be tempting in terms of not taking too much interest rate risk at this point,” he said.

Fund selectors have also been attracted by the real yields – return adjusted for inflation – currently offered by TIPS ETFs.

ITPS currently has a real yield of 1.95% while the iShares $ TIPS 0-5 UCITS ETF (TIP5) is currently yielding 1.98%. 

Alex Brandreth, CIO at Luna Investment Management, recently allocated to TIP5 to lock in higher yields at the shorter end of the yield curve.

“TIPS currently have a positive real yield in the US which is attractive,” Brandreth told ETF Stream

Will Thompson, chief sustainability officer, portfolio manager at Pacific Asset Management, said he added some inflation protection “late last year”.

“TIPS look reasonably attractive with real yields where they area and we have been adding some inflation exposure,” he said.

Short-duration fixed income ETFs have also been an attractive play this year on the view rates could stay higher for longer.

The iShares € Govt Bond 1-3yr UCITS ETF (IBGS) has seen inflows of $313m while the iShares $ Treasury Bond 0-1yr UCITS ETF (IB01) and the JPM Beta Builders US Treasury Bond 0-1 YR UCITS ETF (BBIL) recorded $165m and $163m net new assets, respectively.