Charles Schwab and Vanguard see massive inflows into US TIPS ETFs

Aug 29th, 2019 | By | Category: Fixed Income

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Two US-listed ETFs providing exposure to Treasury Inflation-Protected Securities (TIPS) are enjoying significant demand as investors position their portfolios to withstand the effects of future interest rate cuts.

Charles Schwab and Vanguard see massive inflows into US TIPS ETFs

Charles Schwab and Vanguard have seen massive inflows into their US TIPS ETFs on the back of Fed-induced inflation projections.

The Schwab US TIPS ETF (SCHP US) and Vanguard Short-Term Inflation-Protected Securities Index Fund (VTIP US) have recorded net inflows of approximately $850 million and $460m, respectively, over the past month (as of 28 August 2019).

The inflows, which have boosted the Schwab fund’s assets under management by 14.5% to $6.6 billion and the Vanguard ETF’s by 8.2% to $5.5bn, appear to be in response to the Federal Reserve cutting its policy rate to a range of 2%-2.25% on 31 July – a move which traditionally increases inflationary pressure within an economy.

TIPS differ from regular Treasury bonds in that the principal amount of a TIPS issue is adjusted over time to reflect changes in the underlying Consumer Price Index. This feature enables TIPS to offer a means of portfolio protection against potential increases in US inflation.

For investors wishing to mitigate the effects of inflation using TIPS, the Schwab and Vanguard ETFs are two of the best vehicles on the market, boasting impressive levels of liquidity and ultra-low expense ratios of just 0.05% and 0.06% respectively.

Yet, despite the hefty flows into TIPS ETFs, there has not been consistent agreement among market participants on the outlook for the trajectory of inflation given the increasing risk of recession from the ongoing US/China trade war.

Indeed, inflation expectations have actually fallen over the past month as indicated by the 1.9% loss on the Lyxor US$ 10Y Inflation Expectations UCITS ETF (INFU LN). This European domiciled fund targets the spread between traditional bond yields and those of inflation-linked bonds at the ten-year maturity mark, thus offering a pure-play on inflation expectations.

The ProShares Inflation Expectations ETF (RINF US), listed on NYSE Arca, which focuses on 30-year inflation expectations, has slumped 6.6% over the same period.

However, while the Lyxor and ProShares funds are clearly down over the past month, the returns on both ETFs are basically flat since 15 August 2019 and, as of yesterday, had started to tick upwards again, potentially indicating a reversal in inflation expectations. And with another interest rate cut surely imminent (Federal Fund Futures are pricing in a more than 95% probability of a cut at the FOMC’s next meeting on 17-18 September) TIPS ETFs could be set for further inflows.

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