Inflation continues to persist higher than its long-term norm. Very few sectors of the U.S. economy have performed well. In this article, we discuss how ETFs designed with inflation in mind have fared in this current economic environment.
Historical rates of inflation
The U.S. Bureau of Labor Statistics (BLS) is an excellent free source of historical rates of inflation. The image below shows this data for the last 20 years. Clearly, the current inflation rate is above the norm of 2-3%. However, it does appear to be down somewhat from its high in June. Fortunately, we don’t see any recent “grey” area in this chart, which represents the U.S. in a recession, as determined by the National Bureau of Economic Research.
ETFs to protect against inflation
We chose three ETFs to show that not all ETFs are created equal in addressing inflation. Here, the acronym “TIPS” stands for “Treasury Inflation-Protected Securities”.
- iShares Barclays TIPS ETF (ticker: TIP), $25B in assets
- SPDR Bloomberg Barclays 1-10 Year TIPS ETF (ticker: TIPX), $1.4B in assets
- Vanguard Short-term 0-5 year Inflation Protected ETF (ticker: VTIP), $17B in assets
The most significant difference in these three ETFs is the term to maturity of the bonds contained within them. This difference has led to very different total returns for these three ETFs in 2022, as shown below.
So, what’s going on?
As one of my favorite writers at the Wall Street Journal recently wrote about, rising short-term interest rates are having greater impacts on the price of longer-dated bonds. This impact includes treasuries with inflation protection which each of these ETFs contains. The weighted average maturities for these three ETFs are 7.4 years, 4.7 years, and 2.5 years. By comparison, the broad-based iShares Core U.S. Aggregate Bond ETF has a weighted average maturity of 8.7 years and is down about 11% in 2022. So here, we see the limitation of a fund, like an ETF, that maintains a steady average maturity. Rising interest rates are offsetting the inflation benefit. Unfortunately, investors can avoid this with a bond ladder, but doing so requires investors to leave the relative ease of investing in ETFs.
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