Refinitiv Lipper Chart of the Week: TIPS Funds Post Record-Setting Net Inflows During Q3

Funds in Refinitiv Lipper’s Inflation-Protected Bond (TIPS) classification (including both mutual funds and ETFs) took in $305 million of net new money for the fund-flows week ended Wednesday, October 7. These results marked the group’s sixteenth straight week of net positive flows which have produced a best-ever quarterly net inflow of $13.4 billion during the third quarter. This number shattered the previous record inflow of $8.2 billion which occurred during the second quarter of 2009 (Refinitiv Lipper began tracking flows data on TIPS funds during the third quarter of 2002).

TIPS is an acronym for Treasury inflation-protected securities. As its name suggests, TIPS are a type of Treasury bond issued by the U.S. government which are designed to safeguard investors against a spike in inflation. It may seem counterintuitive that TIPS funds have prospered from a fund-flows (and performance) perspective at a time when the country is struggling to fight off a significant economic contraction and inflation is well below the Federal Reserve’s target of 2.0%, but there are reasons that explain this. First, the performance of TIPS are positively correlated to the direction of the Consumer Price Index (CPI). The CPI is a statistic that is used to gauge the direction of inflation, and this measure has increased in each of the last four months. Other contributing factors which have the potential to drive an increase in inflation include the current record-low interest rates (near zero) and the Fed’s new policy to let inflation run unimpeded over its 2% target to compensate for times of low inflation. The Fed has stated that it expects interest rates to remain unchanged at least through the end of 2023. In addition, another round of fiscal stimulus from the government and an improving labor market are other factors which could serve to heat up the economy and inflation. From the flows and performance results for TIPS funds, it appears that the investing community has already baked in these factors. TIPS funds recorded the best quarterly return (+3.1%) among Refinitiv Lipper’s Government/Treasury funds peer groups. As a whole, the other Government/Treasury funds classifications returned just positive 0.4% on average for the quarter.

Net inflows for TIPS funds during the quarter were evenly split between ETFs (+$6.8 billion) and mutual funds ($6.6 billion), with the majority of the largest individual net positive flows attributable to passively managed products from both of these fund universes. On the mutual fund side of the ledger, Vanguard Short-Term Inflation-Protected Securities Index Fund (+$3.0 billion), Vanguard Inflation-Protected Securities Fund (+$2.1 billion), and Fidelity Series Inflation-Protected Bond Index Fund (+$710 million) registered the best net inflows for the quarter. Meanwhile, ETFs were led by iShares TIPS Bond ETF (TIP, +$2.7 billion) and Schwab US TIPS ETF (SCHP, +$1.9 billion).