The results of the analysis were encouraging, so the methodology was used to evaluate the two-year and five-year breakeven inflation rates as well. Across each of the time frames, the results were consistent.
Rotating between TIPS and Treasurys, using the level of the breakeven inflation rate as a trigger appears to be a viable strategy. As it happens, the breakeven rates for each of these time frames are hovering just above 1 standard deviation below the average, signaling it may soon be time to begin a back-rotation into TIPS.
Inflation-Linked Bond ETFs
There are many fine inflation-linked bond ETFs. Let’s review three different kinds that we find interesting.
- First, there are the longer-duration TIPs ETFs, such as the iShares TIPS Bond ETF (TIP | A-99) or the Schwab U.S. TIPS ETF (SCHP | A-99). Both of these ETFs are low-cost and provide dependable longer-duration, high-quality inflation-protected fixed-income exposure. “TIP” is the giant in this inflation-protected fixed-income space and trades well, but SCHP’s expense ratio is even lower. Given their characteristics, both work well for core strategic allocations.
- Many investors, including ourselves at CLS, also like shorter-duration inflation-linked ETFs, both for strategic reasons (ability to hedge inflation) and tactical reasons (given the low level of interest rates). The PIMCO 1-5 Year US TIPS Index ETF (STPZ | A-74), the FlexShares iBoxx 3-Year Target Duration TIPS ETF (TDTT | A-46) and the Vanguard Short-Term Inflation-Protected Securities ETF (VTIP | A-98) are all fine ETFs.
- The last grouping that intrigues us is the international inflation-linked fixed-income ETFs. Given the U.S. dollar’s run of late, the buck now looks overbought and overvalued. For those investors looking for international fixed-income exposure, the SPDR DB International Government Inflation-Protected Bond ETF (WIP | B) and the PIMCO Global Advantage Inflation-Linked Bond Exchange-Traded ETF (ILB | C) are interesting. The latter is doubly interesting, as it is an actively managed fixed-income ETF, something that PIMCO has been able to do successfully with a few other fixed-income ETFs.
The takeaway is this: There are plenty of choices in the TIPS ETF market, and it’s wise to keep up on them, as sooner or later, inflationary pressure is likely to start climbing.
CLS Investments is an Omaha, Neb.-based third-party investment manager and ETF strategist. CLS began to emphasize ETFs in individual investor portfolios in 2002, and is now one of the largest active money managers using exchange-traded funds, with more than $2 billion invested. Contact CLS’ Chief Investment Strategist Scott Kubie at 402-896-7406 or at [email protected]. Please click here for a complete list of relevant disclosures and definitions.