TIPS ETFs Protect From Inflation Risk, Not Interest Rate Risk

With the Federal Reserve looking to start raising interest rates as soon as next month, investors may be looking for ways to protect their portfolio. While many may look at moving assets into more conservative assets like short term bonds and Treasuries, some will look to Treasury Inflation Protected Securities (TIPS). And that could be a mistake.

 

TIPS work almost just like traditional bonds except that they are indexed to the current rate of inflation. For example, if a $1,000 bond is purchased at par value and the inflation rate is measured at 2%, at the end of the year the principal balance of that bond will be adjusted to $1,020. The higher the inflation rate, the higher the principal balance adjustment. But that's where the protection ends.

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