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ETF Overview
The iShares TIPS Bond ETF (TIP) focuses on inflation-protected bonds in the United States. The ETF tracks the Bloomberg Barclays U.S. Treasury Inflation-Linked Bond Index. TIP has low credit risk, as the bond is backed by the credit of the U.S. government. However, its weighted average term to maturity of 8.2 years means that the fund’s performance is still sensitive to interest rate changes. In 2008, TIP’s total return of negative 0.53% was much better than the decline of 38.5% for the S&P 500 Index. Therefore, it is a good investment choice for investors seeking safety in an economic downturn.
Data by YCharts
Fund Analysis
Low credit risk
TIP’s portfolio includes nearly 100% U.S. treasury bonds. These are investment grade bonds (AAA rated) that have very little credit risk.
Source: iShares website
Interest rate risk
About half of TIP’s bonds have maturities within 5-10 years). As can be seen from the table below, 24.96% of its portfolio of bonds will mature about 5~7 years from now. About 27.01% of its portfolio of bonds will mature between 7-10 years. The average duration to maturity is about 8.2 years. This means that the ETF is still rate-sensitive (although TIP is less rate-sensitive than other ETFs with longer-term average maturity years).
(Source: iShares website)
Higher management expense ratio than its peers
TIP has a management expense ratio of 0.19%. This is higher than Schwab U.S. TIPS ETF’s (SCHP) 0.05% and the Vanguard Short-Term Inflation-Protected Securities ETF’s (VTIP) 0.06%. TIP’s higher MER is reflected in its fund performance. Below is a chart that shows the fund performance of these three ETFs. As can be seen, TIP’s fund performance lagged behind that of SCHP and VTIP. For readers’ information, SCHP and TIP both track the same index. Therefore, it makes more sense to invest in SCHP than TIP.
Data by YCharts
A 2.18%-yielding dividend
TIP’s dividend yield in the past 12 months is 2.18%. This is comparable to its peers. As the chart below shows, SCHP’s 2.08% and VTIP’s 2.38% are not far from TIP’s 2.18%.
Data by YCharts
Macroeconomic Analysis
The current economic cycle is well into its 10th year. Nevertheless, there are already many signs that we are in the late-cycle environment. For example, treasury yield (10-year minus 2-year) is now near the point of inversion (see chart below). As can be seen from the chart below, economic recessions often precede with yield inversions (when the 10-year yield minus 2-year yield falls below 0%).
(Source: Federal Reserve Bank of St. Louis)
Besides yield inversion, we are also seeing signs of investors rotating away from riskier assets (e.g., energy, industrial, etc.) towards defensive sectors (e.g. telecom, utilities, REITs, etc.). This equity rotation is often a sign of a late-cycle environment. Since TIP is considered a defensive fund, the fund price has benefited from this trend. This is evident in 2008, where its total return was only down 0.53%. On the other hand, the S&P 500 Index declined by 38.5%. Therefore, we think investors can continue to hold on to TIP in an economic downturn.
Data by YCharts
For investors seeking decent capital appreciation, TIP is not a fund to invest in. As the table below shows, its average annual total return in the past 10 years was only 3.82%. This is much lower than the S&P 500 Index’s 16%.
(Source: iShares website)
Investor Takeaway
TIP is a good ETF to be included in one’s portfolio, as it provides downside risk protection versus equity ETFs. However, the fund performance lags the equity market when the economy is booming. If you think an economic recession is imminent, this may be one of the places to park your money. However, we would prefer SCHP given its slightly lower MER than TIP.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This is not financial advice and that all financial investments carry risks. Investors are expected to seek financial advice from professionals before making any investment.
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