As inflation moved rapidly to a multi-decade high in 2022, Treasury Inflation-Protected Securities (TIPS) ETFs became a popular investment option to help protect portfolios. But understanding how TIPS work is not always straightforward. They have some unique characteristics that can sometimes make the investing experience confusing.
Here are answers to some of the most frequently asked questions about TIPS.
TIPS are designed to help investors preserve their purchasing power and protect their investment returns as their principal is adjusted for inflation. Inflation is particularly concerning for bondholders since it can erode the value of future interest and principal payments. TIPS offer a “real” rate of return that adjusts for inflation as interest is paid on the adjusted face value of the bond, creating a gradually rising stream of interest payments, as long as inflation continues to rise.
Long-term total return
The compounded effect of principal adjustment helps TIPS deliver a better long-term total performance relative to nominal bonds.
Inflation protected versus nominal bonds
In March 2022, the US Federal Reserve began an aggressive rate hike campaign to combat rising inflation. Through year end, the rates increased by a total of 4.25%, which was the fastest rate hike cycle in decades. During the same period, QTIP registered a loss of 11%, primarily due to its duration risk amid the unprecedented speed of the rate hike cycle.
Source: Morningstar, as at January 31, 2023.
Commissions, management fees, brokerage fees and expenses may all be associated with Exchange Traded Funds. Please read the prospectus before investing. The indicated rates of return are the historical annual compounded total returns including changes in unit value and reinvestment of all distributions, and do not take into account sales, redemption, distribution, or optional charges or income taxes payable by any security holder that would have reduced returns. Exchange Traded Funds are not guaranteed, their values change frequently, and past performance may not be repeated.
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