Innovation has taken place in all corners of the ETF ecosystem this year, however, there was one strategy in particular that stands out in the rapidly developing fixed income arena.
The $16.7m Tabula US Enhanced Inflation UCITS ETF (TINF) is a first-of-its-kind ETF that takes inflation-linked bond exposure to the next level by combining Treasury Inflation-Protected Securities (TIPS) and US inflation expectations through breakevens.
The way TINF achieves this is twofold. To gain exposure US TIPS, it tracks the Bloomberg Barclays US Govt Inflation-linked index.
Meanwhile, in order to track US breakevens, TINF goes long the Bloomberg Barclays US Government Inflation-Linked 7-10 Year index and short US real yields through the Bloomberg Barclays US Treasury 7-10 Year index.
The ETF is rebalanced monthly in order to ensure balanced exposure to US TIPS and US breakevens.
Tracking both US TIPS and breakevens gives TINF a more intense exposure to US inflation if it does rise in comparison to other inflation-linked ETFs on the European market.
For many investors, both realised inflation and inflation expectations are important measures but existing ETFs force investors to choose between the two, as Michael John Lytle, CEO of Tabula, highlighted.
Highlighting this, the iShares $ TIPS UCITS ETF (ITPS) and the Lyxor Core US TIPS UCITS ETF (TIPG) track indices which directly invest in inflation-linked government bonds only.
“For many investors, both are important measures and a more efficient solution is to combine them,” Lytle added.
Furthermore, the launch of TINF could not be timelier with inflation expectations in the US rising to 1.84% earlier this month, the highest level since May 2019.
This has been driven primarily by the US government’s stimulus package to tackle the impact of the rapid spread of coronavirus.
Just this week, US President Donald Trump revealed he would not block a further $2.3trn coronavirus relief package paving the way for inflation expectations to move higher.
As analysts at Goldman Sachs said: “Given our bullish commodity forecasts, bearish US dollar views, and headline CPI forecasts, our economists see a jump to 3.1% year-over-year in the US CPI in May on positive base effects.”
ETFs to invest in as inflation threatens to make dramatic comeback
As a result, TINF looks set to benefit from this environment as markets head into the new year and while it is more expensive than other inflation ETFs on the market at 0.29%, the exposure to both realised inflation and inflation expectations makes this next generation ETF an interesting option for investors.