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ETF Specialist

TIPS ETFs Can Help Protect From Unexpected Changes in Inflation

While nominal Treasury bonds price inflation risk into their yield, they do not protect against unexpected inflation.

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Funds tracking the Bloomberg Barclays Aggregate Bond Index (“the Agg”) can be great core bond holdings. Broad and conservative, these funds offer investors exposure to an area of the investment-grade bond market that is wide enough to effectively diversify sector and issuer risk, and conservative enough to serve as ballast for an equity allocation.

While inflation risk is priced into the yield of each fixed-income security contained in the Agg, that doesn’t mean it is priced appropriately. Realized inflation can exceed expected inflation. Unexpected inflation is harmful to bond investors.

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