Appetite for Treasury Inflation-Protected Securities ETFs, also known as TIPS, may soon increase.
According to Charles Schwab’s DJ Tierney, these investments are becoming more attractive as the economy shows more signs of slowing.
“With the rate moving up and inflation breaking even, [TIPS ETFs] it might make more sense right now than it did a year or two ago,” the firm’s senior investment portfolio strategist told CNBC’s “ETF Edge” last week. “We still believe in it for the long term.”
TIPS ETFs are inflation-indexed, so their principal value adjusts upward when inflation rises. Despite significant inflows in 2020, TIPS ETFs have seen significant outflows this year.
“What you’re seeing in 2022, it’s just a little bit of the pendulum swinging the other way,” Tierney said. “Is inflation as big of a concern right now as it was a year ago? Probably not. Investors may have made tactical allocations towards TIPS ETFs and maybe they’re pulling back a bit.”
Tierney is the client liaison for Schwab US TIPS ETF, which is down 16% so far this year. However, in the last two months it has risen more than 2%.
‘Very hard year’
“It is encouraging that in the face of a very difficult year, we are still seeing investors as a whole use ETFs as a long-term investment vehicle,” Tierney said.
However, VettaFi financial futurist and ETF expert Dave Nadig cautioned that TIPS breakeven points tend to be driven more by investor sentiment than reality.
“TIPS are one of those things that are notoriously hard to hit even for big traders,” he said. “The old adage is that by the time you’ve decided to make a TIPS trade, whether it’s in or out, you’re probably wrong.”
But if investors can get the timing right, Nadig said the downtrend in TIPS could reverse soon.
“We have had massive outflows in TIPS, but the breakeven point in 10-year TIPS is 2.3%, which means you have to believe that inflation will average less than 2.3% to choose pure Treasuries over TIPS. to 10 years,” Nadig said. “I think it’s a pretty good bet… that now may be the right time to go in.”
Source: news.google.com