What You Need to Know
- Schwab continues to see the value of TIPS ETFs as a hedge against inflation.
- But not all panelists during an EDGE conference panel session entirely agreed.
- Schwab's D.J. Tierney also warns that baby boomers are overexposed to equities.
Treasury inflation-protected securities continue to be a good buffer against long-term inflation for at least some investors, D.J. Tierney, senior client portfolio strategist at Schwab Asset Management, said Wednesday at the Wealth Management EDGE conference in Hollywood, Florida.
During the panel session “Are TIPS a Good Inflation Hedge?” Tierney and others gave their takes on how portfolios should be positioned for high inflation. They didn’t all agree on the effectiveness of TIPS investing right now.
Asked by an attendee how investors can get simple exposure to TIPS, which are a type of U.S. Treasury security whose principal value is indexed to the rate of inflation, Tierney noted that one way is through the Schwab U.S. TIPS ETF.
That exchange-traded fund’s goal is to track as closely as possible, before fees and expenses, the total return of an index made up of inflation-protected U.S. Treasury securities.
Tierney called TIPS ETFs a “really elegant solution for a lot of fixed income allocations,” noting they’re “inexpensive, tax-efficient.”
“If you’re just buying” a similar index, “you’re missing” the full benefit of the hedging strategy, he told attendees.
ETFs and Fixed Income
“If you’re not managing your fixed income allocation through ETFs, that’s a huge miss,” Michael Contopoulos, director of fixed income at Richard Bernstein Advisors, told attendees.
After all, he said: “If you’re using a traditional long mutual fund manager, buying individual bonds, [and] you have massive liquidity issues, the bond market has becomes less and less liquid. It’s not tax efficient.
“So I think using ETFs to manage a fixed income portfolio” makes sense, although not necessarily TIPS ETFs.”
There are a few “fixed income concepts that have done well over the last 6, 12, 18, 24 months and you can get exposure to them through ETFs,” he pointed out. “That’s what we do at RPA. We basically only use ETFs…. And we actually owned an ETF last year. Eighty-five percent of that ETF was Schwab’s TIPS ETF.”
But TIPS ETFs are not necessarily a great option right now for investors in general, according to Contopoulos.
As Schwab itself concedes at its website, if inflation rises sharply, TIPS may not perform well over the short term. Along with inflation adjustments, “TIPS performance over the short run is also driven by price appreciation or depreciation depending on any change in the TIPS’ yields,” according to Schwab.
If yields increase enough where the security’s price declines enough to offset the inflation adjustment, total returns may be negative, says Schwab. Similarly, if yields decline further and prices rise in the short run, total returns could be strong given both price appreciation and the inflation adjustment, according to the firm.