With rising interest rates creating an unfavourable backdrop for fixed income, inflation-protected strategies such as the iShares $ TIPS UCITS ETF (ITPS) and Tabula US Enhanced Inflation UCITS ETF (TINF) may appeal due to their ability to shield against downside risks.
Though both offer exposure to Treasury Inflation-Protected Securities (TIPS), their scales and the approaches taken by the two ETFs are diametrically opposed.
Looking at their headline numbers, for instance, ITPS boasts $3.7bn assets under management (AUM), with inflows of $969m over the trailing 12 months, as at 24 January, according to data from ETFLogic. Meanwhile, TINF is incomparably smaller gathering $94m AUM since launch in December 2020.
There is also a rift in their returns. While ITPS and TINF have both fallen by 2.6% and 3.4% YTD, respectively, TINF has far outstripped ITPS over the past year, with returns of 10.1% versus 2.9%.
Exposure and methodology
Looking under the bonnets of the two ETFs, ITPS opts for a vanilla, index-tracking approach to its TIPS exposure while TINF involves some innovative financial engineering.
ITPS applies a sampling methodology to track the performance of 45 fixed income securities of different maturities from the Bloomberg US Government Inflation-Linked Bond index, with a weighted average maturity of 8.6 years and an average yield to maturity of 1.31%.
TINF aims to capture the performance of the Bloomberg US Enhanced Inflation index which offers 100% exposure to both the realised-inflation portfolio of the Bloomberg US Govt Inflation Linked index, with an average maturity of 7.3 years and a yield to maturity of 1.43%, and US breakevens, which are inflation expectations calculated as the difference between US TIPS and US real yields.
The ETF holds physical TIPS to track the Bloomberg US Govt Inflation-Linked index and employs over the counter (OTC) total return swaps with a counterparty where it receives the return of the US Breakeven Inflation Rate – 2.6% at the end of 2021 – minus pre-agreed costs.
While ITPS is more in tune with the ETF orthodoxy of passive tracking, TINF has the edge in this category as it takes a more dynamic approach to inflation protection, which as seen with returns over the past year, has enabled it to outperform.
It also has a higher yield to maturity and a lower average duration, which – in simple terms – is
favourable during periods of rising rates as they lock in these rates hikes for a shorter time period.
Perhaps predictably, the engineering on TINF comes with a corresponding higher cost of ownership attached. While ITPS charges a total expense ratio (TER) of 0.10%, TINF has a fee of 0.29%.
However, the disparity in costs is actually wider than this. Neither product discloses their portfolio trading costs but as part of its swaps agreement, TINF incurs a funding cost that changes each year but is factored into its returns calculation.
Also, ITPS engages in securities lending on its portfolio, further reducing the impact of its fee by three basis points (bps).
As for trading costs, the average spread on primary listings of TINF is 36 bps versus 15 bps for ITPS, according to data from Bloomberg Intelligence, likely owing to differences in the two products’ scales.
Overall, ITPS is the larger, more economical and traditional route for gaining TIPS exposure whereas TINF offers a new way to play TIPS with potentially outsized returns versus most fixed income strategies. Which side of the cost-methodology trade-off is preferable, is at the discretion of investors.
This article first appeared in ETF Insider, ETF Stream's monthly ETF magazine for professional investors in Europe. To access the full issue, click here.
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