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Investors take refuge in inflation linked bonds ETFs
The U.S. annual inflation rate reached 6.2% for the 12 months ended October 2021, the highest since November 1990.
By Rony Abboud
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- Government Bonds
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With inflation running hot in 2021, investors are looking for instruments to protect their assets from value erosion.
In the U.S. many investors have taken refuge in TIPS ETFs like the iShares TIPS Bond ETF or TIP. It's the largest TIPS ETF in the world with over $37.6 billion in assets. The fund has amassed more than $10.86 billion in net inflows this year after the U.S. annual inflation rate reached 6.2% for the 12 months ended October 2021, the highest since November 1990.
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TIPS stands for Treasury Inflation-Protected Security. It's a treasury bond that is indexed to an inflationary gauge to protect investors from the decline in the purchasing power of their money. The principal value of TIPS rises as inflation rises while the interest payment varies with the adjusted principal value of the bond. Investors are protected since they will never receive back their principal amount less than the originally invested principal.
European Investors hedged against inflation with products like Xtrackers II Eurozone Inflation-Linked Bond UCITS ETF (XEIN). XEIN holds EUR-denominated inflation-linked bonds issued by governments of the Eurozone, providing exposure across the whole yield curve (minimum time to maturity of 1 year). The fund has amassed more than €400 million in inflows this year with the inflation bug running deep in the Euro Area.
Recent Euro Zone data for November shows that headline inflation came in at 4.9%, compared to the same month last year. This was above a consensus forecast of 4.5% from Reuters and was higher than October’s 4.1%. The figure was the highest on record in the 25 years that the data has been compiled.
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