The Smart Money’s Favorite Inflation Hedge ETF

Interest in inflation protection has surged as investors digest the Federal Reserve’s latest stance on rate cuts.

The Vanguard Short-Term Inflation-Protected Securities ETF (VTIP) leads our TrackStar data this week, with search volume four times higher than its closest competitor.

This $53.9 billion ETF offers a straightforward approach to inflation protection through short-term Treasury Inflation-Protected Securities (TIPS).

Recent performance suggests financial professionals might be positioning for an inflation surprise in 2024.

Key Facts About SMH

• Net assets: $12.0 billion
• 12-month trailing yield: 2.89%
• Inception: October 12, 2012
• Expense ratio: 0.04%
• Number of holdings: 28

VTIP provides direct exposure to U.S. TIPS with maturities between zero and five years. The fund’s average duration of 2.4 years limits interest rate risk while maintaining inflation protection.

The strategy focuses exclusively on government-backed securities, eliminating credit risk from the equation. Each bond’s principal adjusts based on changes in the Consumer Price Index (CPI), providing a direct hedge against inflation.

Source: Vanguard

The ETF’s current yield to maturity of 4.1% reflects both the income from bond coupons and the inflation adjustment component.

The fund’s holdings concentrate in high-quality, short-term TIPS, with the top positions including Treasury securities maturing between 2025 and 2029.

Source: Vanguard

Performance

VTIP demonstrates remarkable consistency across various market conditions. The fund delivered a 6.0% return over the past year and maintains a steady 3.5% five-year annualized return.

More impressively, VTIP has matched its benchmark almost perfectly, with just a 0.01% tracking difference over the past year. This precision, combined with its microscopic 0.04% expense ratio, makes it one of the most cost-effective inflation hedges available.

Since inception, the fund has returned 1.9% annually, reflecting periods of both high and low inflation. Recent returns show increased momentum, with a 4.9% gain year-to-date as inflation concerns persist.

Source: Vanguard

Competition

Several ETFs compete in the inflation-protected space, each with distinct approaches:

• Goldman Sachs Access Inflation Protected USD Bond ETF (GTIP): Offers a similar strategy to VTIP but with significantly lower assets at $140 million and a higher 0.12% expense ratio. Its higher yield of 3.22% comes with reduced liquidity.
• SPDR FTSE International Government Inflation-Protected Bond ETF (WIP): Provides international diversification but struggled with an -8.8% five-year return. Its 0.50% expense ratio and currency exposure introduce additional risks.
• Fidelity Stocks for Inflation ETF (FCPI): An equity-based twist on inflation protection, focusing on stocks with strong pricing power.
• ProShares Inflation Expectations ETF (RINF): Uses a unique approach, tracking inflation expectations rather than actual inflation by targeting the breakeven rate between nominal Treasuries and TIPS. 

Our Opinion 10/10 

VTIP excels in nearly every category that matters for an inflation hedge: low costs, high liquidity, direct inflation protection, and consistent tracking.

The 0.04% expense ratio ranks among the lowest in its category, while an average daily volume of 1 million shares ensures easy trading. The fund’s massive asset base provides stability, and its focus on short-term TIPS limits interest rate risk.

Plus, it outperforms ETFs similar such as GTIP.

This ETF suits conservative investors seeking efficient inflation protection without taking on excessive risk. It works particularly well in retirement accounts or as a core fixed-income holding for investors concerned about inflation’s long-term impact on purchasing power.

The only reason it doesn’t score a perfect 10 is the current low inflation environment, which could limit near-term returns. However, its role as an insurance policy against future inflation surprises maintains its high strategic value.