(Bloomberg) — A once-dominant BlackRock Inc. bond ETF is at risk of losing its crown as the biggest inflation-hedging product of its kind, after schooling investors about the dangers of safety trades laden with interest-rate risk.
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The iShares TIPS Bond ETF, benchmarked to a broad index of Treasury inflation-protected securities with an average maturity of about seven years, incurred losses in 2022 as Federal Reserve interest-rate increases pushed bond yields higher. Its income payments — despite being tied to the inflation the Fed was fighting — were fully offset by the resulting drop in the value of its holdings.
BlackRock subsequently decided that its LifePath target-date retirement funds would no longer invest in the fund, known by its ticker TIP. Instead, the LifePath funds would hold shares of iShares 0-5 Year TIPS Bond ETF, or STIP, which is less vulnerable when yields rise.
As BlackRock implemented the changes over the past three months, TIP — which had nearly $40 billion in assets at its peak in December 2021 — shrank by about 27% to less than $14 billion. Meanwhile STIP has increased by 40% to nearly $11 billion.
Launched in 2003, TIP was the first US inflation-linked bond ETF and is still the largest. At its peak it was the largest Treasury debt ETF of any kind. Now, it’s just $1 billion bigger than its closest rival — Vanguard Short-Term Inflation-Protected Securities Index Fund (VTIP).
The case for shifting into shorter-maturity market hedges, with a more limited dose of interest-rate risk, was potentially strengthened this week when the Fed said it was in no rush to ease monetary policy again.
“More and more investors understand that TIPS — especially long-end TIPS — are real rate products” that suffer when the Fed raises rates, said Gang Hu, managing partner at Winshore Capital Partners, which specializes in inflation-linked investments. “The best market participants can do is to invest in a fund with the same inflation exposure but less rates exposure.”
The shift in assets away from longer-maturity products has implications not only for the market, but also for the US Treasury Department as it considers whether to further increase the amount of TIPS it sells. Advisers to the department have recommended that it consider adding a three-year TIPS to its existing lineup of five-, 10- and 30-year securities, and the department sought feedback from dealers on the topic in October.
