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The backdrop of inflation

The backdrop of inflation may soon enhance interest in this choppy bond speculation

TIPS ETFs, also known as Treasury inflation-protected securities, may soon become more popular.

D.J. Tierney of Charles Schwab claims that these assets draw greater interest as the economy slows down.

“With the rate moving upward and inflation breakeven, [TIPS ETFs] might make more sense right now than they did a year or two ago,” the company’s senior portfolio investment strategist told CNBC’s “ETF Edge” last week. “We still believe in it for the long haul.”

The primary value of TIPS ETFs is indexed to inflation, so as inflation increases, it is increased. As a result, TIPS ETFs have been seeing significant outflows this year despite substantial inflows in 2020.

“What you’re seeing in 2022, it’s just a little bit of the pendulum swinging the other way,” Tierney remarked. “Is inflation as big a concern right now moving forward as it was a year ago? Probably not. Investors might have made tactical allocations towards TIPS ETFs, and maybe they’re pulling that back a little bit.”

Schwab U.S. TIPS ETF, which is down 16% so far this year, has Tierney as its client liaison. But over the last two months, it has increased by more than 2%.

‘A rough year ahead.’
“It’s just heartening that in the face of a very tough year, we’re still seeing investors in aggregate utilize ETFs as a long-term investment vehicle,” Tierney stated.

However, financial futurist for VettaFi and ETF authority Dave Nadig warned that TIPS breakevens frequently reflect investor mood more than actual market conditions.

“TIPS are one of these things that are notoriously difficult for even really great traders to get right,” he said. “The old adage is by the time you’ve decided to make a trade-in TIPS either in or out; you’re probably wrong.”

However, according to Nadig, the slump in TIPS could soon turn around if investors can time their purchases correctly.

“We’ve had massive outflows in TIPS, but the breakeven on the 10-year TIPS is 2.3%, which means you have to believe inflation will average less than 2.3% to choose the straight Treasury over the 10-year TIPS,” Nadig said. “I think that’s a pretty good bet … that now may be the right time to get in.”