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ETF Specialist

TIPS ETFs Fight Inflation ... But Not the Kind You Expect

"Inflation-protected" doesn't always translate to inflation hedging. It's time to debunk common myths about the role of TIPS and the ETFs that buy them.

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With a name like Treasury Inflation-Protected Security, perennially favored TIPS certainly seem like a natural choice for an inflation hedge. Unfortunately, TIPS funds don’t do that particular job as well as many might expect. An inflation hedge is an investment that co-moves with inflation and preserves purchasing power, but the TIPS indexes tracked by the largest exchange-traded funds have historically exhibited only a small positive level of correlation to inflation--far from a perfect inflation hedge in the traditional sense.

Despite their low correlation to inflation, TIPS funds remain wildly popular: About $27 billion is invested in the 10 TIPS ETFs currently on offer. These funds may not be a perfect inflation hedge, but they are a great option for the investor who thinks the market is underestimating future inflation--in other words, for hedging against unexpected inflation.

Abby Woodham does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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