What Are TIPS ETFs?

Treasury Inflation-Protected securities (TIPS) exchange-tജraded funds (ETFs) mainly hold U.S. government bonds designed to protect investors against inflation. The principal value of TIPS rises and falls based on the Consumer Price Index (CPI).

TIPS ETFs hold a portfolio of TIPS bonds with varying maturities. By investing in these ETFs, you gain exposure 𝔉to the TIPS market in one security from an ETF that trades on the major stock exchanges. As inflation rise🌳s, the value of TIPS bonds increases, as does the net asset value (NAV) of the ETF.

TIPS ETFs can be a good fixed-income option for investors to hedge inflation risk. They provi♉de easy access to the benefits of TIPS with the convenience, diversification, and flexibility of ETFs.

Understanding TIPS ETFs

A key feature of TIPS, first offered by the Treasury in the late 1990s, is that the principal value adjusts upward or downward in line with the Consumer Price Index, a standard measure of inflation. When inflation increases, the principal value of TIPS increases. When inflation decreases, the principal decreases. These adjustments help TIPS maintain a real rate of return when factoring in inflation. When TIPS mature, investors are paid back the inflation-adjusted principal or the original principal, whichever is higher. This provides downside protection ag💞ainst deflation.

TIPS also have a fixed coupon rate (i.e., interest payments), which are paid out semiannually. The coupon payments stay the same throughout the bond's life, while the principal value fluctuates according to the CPI.

Brokers construct TIPS ETFs by purchasing and holding a basket of TIPS tracking a specific TIPS index, such as using the Bloomberg Barclays U.S. Treasury Inflation-Protected Securities Index. The index is composed of TIPS with at least one year remaining until maturity and is weighted by the adjusted market capitalization of each bond.

TIPS ETFs, such as Vanguard's Short-Term Inflation-Protected Securities ETF (VTIP), may use index sampling techniques to replicate the index's performance or hold all the bonds in the index.

TIPS ETFs vs. TIPS

The following table demonstrates the differ🃏ences between TIPS ETFs and purchasing TIPS directly.

TIPS ETFs Benefits

Here are some key🍃 benefits of investing in TIPS ETFs:

• Inflation hedge: ETFs offer easy access to inflation-protected securities that can help hedge against an investment portfolio’s inflation risk. As inflation rises, so does the principal value of the underlying TIPS.
• Diversification: This is the strategy of spreading investments across different asset classes, sectors, regions, and styles to cut the overall risk and volatility of a portfolio. Adding TIPS ETFs to a portfolio can diversify beyond equities and conventional bonds. They have a low correlation with the prices of stocks and nominal bonds. In addition, TIPS ETFs provide easy access to inflation-protected bonds without building a ladder for individual TIPS bonds yourself.
• Convenience and liquidity: TIPS ETFs trade daily on major exchanges so that they can be bought and sold quickly via brokerage platforms throughout the day. Many brokerages also offer commission-free trading in ETFs. As the underlying TIPS mature, TIPS ETFs roll them over to maintain their target maturity range.
• Lower investment minimums: You have a lower minimum investment when buying shares in TIPS ETFs than when buying individual TIPS directly. You would need to 澳洲幸运5官方开奖结果体彩网:invest in increments of $10๊0 to purchase TIPS via TreasuryDirect, but you can typically use any amount to buy fractional shares in a TIPS ETF.

TIPS ETFs Risks and Drawbacks

While TIPS ETFs have many advantages, there are some potential downཧsides to consider:

• Higher expenses: TIPS bought directly do not have any fees attached. TIPS ETFs, however, have 澳洲幸运5官方开奖结果体彩网:expense ratios that cover the ETF’s administrative costs. These can range from 0.03% to more than 1.0% per year. This eats into returns slightly more than when buying TIPS directly. However, for smaller investors, the convenience and diversification of TIPS ETFs may counteract the marginally higher expenses.
• Tracking error: TIPS ETFs aim to track the performance of the overall TIPS market, but there will inherently be some 澳洲幸运5官方开奖结果体彩网:tracking errors. The particular index chosen, fund flows, maturity mismatches, and manager skills can cause ETF returns to diverge somewhat from the TIPS market. Actively managed TIPS ETFs tend to have more tracking errors and higher fees.
• Liquidity mismatches: While ETFs are liquid, the underlying TIPS market can have periods of diminished liquidity, which can hamper the fund’s ability to trade or efficiently roll over into new TIPS at maturity.
• Interest rate risks: TIPS ETFs have interest rate risks like conventional bonds and bond ETFs. When interest rates rise, the value of the existing bonds falls. This means rising rates could lead to price declines in the portfolios of TIPS ETFs. Hence, they can still lose value when there’s a rise in inflation if interest rates are rising at a faster pace than the CPI.
• Tax drag: The inflation adjustments to the principal are taxable even though the investor does not receive any cash flow from them. This could create a tax drag on after-tax returns.

Understanding these tradeoffs can help investors decide if a TIPS ETF makes sense for their portfolio or if owning TIPS directly may be preferable. A financial advisor can help you analyze the pros and cons.

Factors to Consider When Investing in TIPS ETFs

The iShares TIPS Bond ETF (TIP) was the first TIPS ETF, launched in 2003 by BlackRock Financial Management. It’s the largest TIPS ETF in assets under management, with $ꦛ14.2 billion as of M♓arch 1, 20241.

According to the VettaFi ETF Database, fewer than 20 TIPS ETFs were trading in the United States in March 2025. These ETFs vary in duration, expense ratio, dividend yield, and performance. Popular TIPS ETFs include the Vanguard Short-Term Inflation-Protected Securities ETF (VTIP), the Schwab U.S. TIPS ETF (SCHP), and the iShares 0-5 Year TIPS Bond ETF (STIP).

If y🎃ou’r♑e considering a TIPS ETF, here are some aspects to consider:

The Bottom Line

TIPS ETFs act as an inflation hedge fo🧜r investors. These ETFs trade like ordinary stock and offer convenience to investors who can trade them from their brokerage platforms. They offer diversification and lower investme𒁏nt thresholds than directly purchasing TIPS from the Treasury while enhancing liquidity and providing regular income streams.

You can choose among several TIPS ETFs with different durations, expense ratios, and liquidity levels, but ensure you unders🌳t꧋and the potential for tracking errors and their tax implications.