Sticky inflation is currently posing a significant worry to investors. High price levels and elevated interest rates could be devastating for stock markets.
Given this backdrop, quality inflation-protected bond ETFs Schwab U.S. TIPS ETF (SCHP), Vanguard Short-Term Inflation-Protected Securities Index Fund (VTIP), and iShares TIPS Bond ETF (TIP) could be wise portfolio additions during turbulent times.
Inflation and its concerns have dominated the headlines over the past two years. The Consumer Price Index (CPI), a key barometer of economic health, has significantly reduced after its summer 2022 peak, which marked a forty-year record high of 9.1%. In October 2023, the CPI was flat from the prior month and rose 3.2% annually, below the Wall Street estimates.
This paints an uplifting tableau, hinting at lingering inflated prices slackening their stranglehold on the American economy, paving the way for the Fed to cease the interest rate hikes.
Lower fuel costs mainly catalyzed October's declining inflation level. A surge in oil demand, coupled with the supply tightening induced by OPEC+ production cuts and the ongoing Israel-Hamas conflict, could skyrocket crude prices. Due to its volatile nature, gasoline prices can readily skew inflation measurements.
Inflation may remain elevated over an enduring timespan than the projections made by financial markets. Since inflation currently towers well above the Fed’s 2% target, interest rates could remain elevated. This could depreciate the purchasing power of cash reserves over time and erode fixed-rate bond returns. Hence, maintaining asset holdings that could serve as a buffer or shield against inflation is crucial.
Combining different inflation-resistant Exchange-Traded Funds (ETFs) with a correlation to the CPI can safeguard a portfolio against wealth erosion while enhancing its resilience.
Considering these conducive trends, let's look at the key attributes of the three best Inflation-Protected Bond ETFs, starting with number 3.
ETF #3: Schwab U.S. TIPS ETF (SCHP)
SCHP is an ETF launched and managed by Charles Schwab Investment Management, Inc. The fund invests in the fixed-income markets of the U.S. It primarily invests in U.S. dollar-denominated fixed-rate non-convertible, investment-grade treasury inflation-protected securities (TIPS) that have at least one year remaining to maturity.
As of November 22, SCHP had $11.72 billion in AUM and an NAV of $50.95. Its total expense ratio is 0.03%, compared to the category average of 0.22%. Its net inflows were $305.74 million over the past three months and $43.39 million over the past month.
SCHP pays a $1.99 annual dividend, which yields 3.90% at the prevailing price. Its four-year average dividend yield stands at 3.78%. Its dividend payments have grown at CAGRs of 35.9% and 6% over the past three and five years, respectively.
SCHP has gained 1.8% over the past month and marginally over the past five days to close the last trading session at $50.96.
SCHP’s POWR Ratings reflect this promising outlook. The ETF’s overall A rating equates to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
SCHP has an A grade for Buy & Hold and Trade. The fund is ranked #3 of 16 ETFs in the B-rated Inflation-Protected Bond ETFs category. Click here to access SCHP’s ratings (Peer).
ETF #2: Vanguard Short-Term Inflation-Protected Securities Index Fund (VTIP)
VTIP is an ETF launched and managed by The Vanguard Group, Inc. The fund invests in the fixed-income markets of the United States. It primarily invests in inflation-protected public obligations of the U.S. treasury with remaining maturities of less than five years.
As of November 22, VTIP had $13.40 billion in AUM and an NAV of $47.42. Its total expense ratio is 0.04%, compared to the category average of 0.22%. It has a beta of 0.37.
VTIP pays a $1.84 annual dividend, which yields 3.87% at the prevailing price. Its four-year average dividend yield stands at 3.65%. Its dividend payments have grown at CAGRs of 42.8% and 3.3% over the past three and five years, respectively.
VTIP has gained marginally over the past three months to close the last trading session at $47.45.
VTIP’s POWR Ratings reflect this robust outlook. The fund’s overall A rating equates to a Strong Buy in our proprietary rating system.
VTIP has an A grade for Buy & Hold and Trade and a B for Peer. Within the same group, it is ranked #2. One can access all the VTIP ratings here.
ETF #1: iShares TIPS Bond ETF (TIP)
TIP, launched by BlackRock, Inc., offers broad-based exposure to TIPS, bonds issued by the U.S. government featuring a principal that adjusts based on certain measures of inflation.
TIP has become tremendously popular as a way of protecting asset values against upticks in inflation, and as such can be used in different ways by different types of investors.
As of November 22, TIP had $19.57 billion in AUM and an NAV of $104.53. Its total expense ratio is 0.19%, compared to the category average of 0.22%.
TIP pays a $3.16 dividend annually, which yields 3.02% at the prevailing price. Its four-year average dividend yield stands at 3.63%. Its dividend payments have grown at CAGRs of 26.8% over the past three years.
TIP has gained 1.7% over the past month and marginally over the past five days to close the last trading session at $104.65.
TIP’s fundamental strength is reflected in its POWR Ratings. The ETF has an overall rating of A, translating to a Strong Buy in our proprietary rating system.
TIP has an A grade for Buy & Hold and Trade. It is ranked first within the same group.
To see TIP ratings for Peer, click here.
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VTIP shares were unchanged in premarket trading Friday. Year-to-date, VTIP has gained 3.15%, versus a 20.36% rise in the benchmark S&P 500 index during the same period.
About the Author: Sristi Suman Jayaswal
The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy. Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors.
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