If inflation starts to ramp up investors can take advantage of Treasury Inflation Protected Securities, or TIPS, to maximize their returns with low risk. Treasury Inflation Protected Securities are a special type of Treasury note or bond that offers investors interest indexed with inflation which means protection from inflation. Assuming that US Treasuries are the safest investments available today then investors can think of TIPS as the safest of safe investments.
Treasury Inflation Protected Securities have become available in recent years as Exchange Traded Funds or ETFs. Currently there are three TIPS ETFs available on the US stock market today:
- Barclays Capital TIPS Bond Fund (TIP) – TIP is an exchange traded fund seeking the performance corresponding to the inflation-protected sector of the U.S. Treasury. As of July 2009 TIP trades for just over $100 per share and has a current market cap of $8.77 Billion. According to Morningstar data the TIP ETF currently has a yield of 4.68% and a total yearly expense ratio of .20%. TIP is the most popular and widely traded ETF of its kind currently.
- SPDR DB International Government Inflation-Protected Bond ETF (WIP) – WIP is an exchange traded seeking the performance corresponding to the DB Global Exchange US inflation linked bond capped index. It holds TIPS in developed foreign countries and even emerging markets (only about 30% of the fund). According to Morningstar data the WIP ETF currently has a yield of 3.70% and a total yearly expense ratio of .50%. There are 55 total current bond holdings and 56.1% of the total bonds held are of AAA quality.
- SPDR Barclays Capital TIPS ETF (IPE) – IPE is an exchange traded with very similar qualities to TIP listed in the first spot above. The ETF focuses on US treasuries and has its performance correspond to the Barclay’s US Gov inflation-linked bond index. According to Morningstar data the WIP ETF currently offers a yield of 3.38% and has a total yearly expense ratio of .19%.
Because of the inflation protection, TIPS have lower yields than regular treasuries of the same maturity. Thus, investors should do research to make sure TIPS are right for their own portfolios.
Further Reading, ETFS: