With many investors are trying to improve the returns of their holdings in this zero interest rate environment, it’s no surprise that ETFs promising higher yields are expanding rapidly. Many of these newcomers will have to prove themselves first over time and show that their volume and yield makes them worthy contenders.
Nasdaq describes the latest ETF addition as follows:
The SPDR Barclays 1-10 Year TIPS ETF (TIPX) looks to follow the Barclays 1-10 YearGovernment Inflation-linked Bond Index which tracks the 1-10 year inflation protected sector of the United States Treasury market. In order to be included in this benchmark, the securities must be TIPS (Treasury Inflation Protected Securities) and have at least one year remaining to maturity and less than 10 years to maturity on the index rebalancing date.
If you are unfamiliar with a TIPS bond, it is worth pointing out that the security guarantees that at least the original investment is paid back at maturity. Additionally, the face value of the bond is adjusted in order to keep up with inflation, protecting investors if the CPI is rising.
Still, it is worth noting that the increase in the bond’s face value is taxed on a yearly basis, so there could be some issues at tax time in high inflation environments. Furthermore, the lower risk nature of these securities definitely eats into the yield as well, so it may not be a top pick for income-hungry investors, especially if you believe that inflation will remain subdued.
Getting back to the product, the issuance size for bonds included must be greater or equal to $500 million as well, while the bonds must also be capital-indexed and linked to a domestic inflation index. Securities must also be issued by the American government and they need to be denominated in U.S. dollars.
The index currently consists of 22 holdings, with no single bond issuance taking up more than 4% of the total. Top holdings are currently skewed towards the short end of the curve, with a modified option-adjusted duration of 3.41, a figure that helps produce an index average yield of just under 1.0%, though it is important to remember that costs are low at just 0.15% a year.
Disclosure: No holdings