TIP ETF analysis as Blackrock recommends inflation-linked bonds

Blackrock, the biggest asset manager in the world, believes that inflation will remain closer to 3% for an extended period this year. As a result, in its recent market commentary, made the case for investing in inflation-linked bonds, popularly known as TIPS. If this works, then the iShares TIPS Bond ETF (TIP) would be ideal.

What is TIP ETF?

TIP is one of the biggest Treasury Inflation Protected Securities (TIPS) ETF in the market with over $18 billion in assets under management. The other similar ETFs are the iShares 0-5 Year TIPS Bond ETF (STIP) and the Schwab US TIPS ETF.

The TIP gives investors exposure to US government bonds whose value rises with inflation. It makes it possible for investors to have access in a single fund and the ability to hedge against persistent inflation risks. The fund has 49 holdings, all Treasuries,  and charges an expense ratio of 0.19%.

Like other TIP ETF, it relies on the official inflation numbers published by the Bureau of Labor Statistics (BLS). The challenge of this is that the fund does not protect investors against the real inflation rate, which is usually higher than the official report.

The TIP ETF has generally not been a good performer over the years. Data compiled by SeekingAlpha shows that its total return in the past 5 years was 14.31%. In the same period, the S&P 500 index has returned 84% while Invesco QQQ has risen by 162%. 

Most importantly, the ETF has not outperformed the market in the ongoing high-inflation period. It has retreated by 9.02% since January 2022 while the S&P has declined by 0.27% and the Nasdaq 100 has risen by 3.16%.

TIPS vs S&P 500 vs Nasdaq 100

Still, Blackrock believes that these bonds are among the best assets to invest in in the long term. In a note, the analysts said:

Risks to this thesis

I believe that investing in TIP ETF has two main risks. First, as mentioned, the fund tends to underperform the market in the long term. Therefore, while past performance is not always a good indicator of what to come, I see it as a sign for what to invest in. In most cases, I prefer buying assets that have done well in the past other than laggards.

The other risk is that inflation will likely continue falling in the coming months. As I wrote earlier on, gasoline prices has dropped to $3, down from $3.2 a year earlier. There are signs that other goods like furniture, used cars, and recreational items will continue falling.

In this case, then it means that investors will not need to protect themselves again inflation. Also, a decline in inflation will likely lead to Federal Reserve interest rate cuts. As a result, stocks, especially technology ones tend to do well when this happens. Therefore, this means that investing in equities will be a better approach to hedge against inflation.