ETF Wrap: This once popular ETF used to hedge against inflation is now out of favor. What investors are doing now.

Sign up here for our weekly ETF Wrap.

The iShares TIPS Bond ETF
TIP,
-0.11%,
which tracks an index of Treasury inflation-protected securities, or TIPS, has seen outflows of nearly $340 million over the past week. Outflows on Wednesday alone exceeded $100 million following the release of a widely followed inflation report, according to FactSet data. 

The U.S. Consumer Price Index report Wednesday showed inflation cooled to the lowest annual rate in two years, but it still remained about more than double the prepandemic average and well above the Federal Reserve’s 2% target rate. 

CPI rose 0.4% in April from the previous month, much faster than the 0.1% increase recorded in March. Prices climbed 4.9% on a year-over-year basis, down from 5% in March. Excluding volatile food and energy categories, the core CPI rose 0.4% monthly and 5.5% from a year ago, both in line with expectations.

Todd Rosenbluth, head of research at VettaFi, said the outflows indicate that investors are responding to inflationary data, and they continue to “be nervous about having exposure to TIPS products.” 

TIPS are a type of Treasury security issued by the U.S. government, which are indexed to inflation to protect investors from a decline in the purchasing power of their money. Unlike other Treasury securities where the principal is fixed, the principal value of a TIPS adjusts with movements in inflation. When it matures, investors get either the inflation-adjusted price or the original principal, whichever is greater. 

“Investors have been racing into TIPS ETFs in 2021 in anticipation of higher inflation, and then they’ve been paring back that exposure ever since,” Rosenbluth told MarketWatch in a phone interview on Thursday. 

“The CPI numbers that came out show that inflation is still here to stay in perhaps different ways than people had been expecting…Now I think there are some mixed signals as to whether or not there are more hikes to occur,” he said. 

Market participants hope that the lower-than-expected inflation data may leave room for the central bank to refrain from raising interest rates further at its June meeting. They also placed a 42% chance that policy makers would begin to trim borrowing costs at their July 25-26 meeting, according to CME FedWatch Tool. 

There is “certainly a risk” for investors who pulled their money out of the inflation-linked bond ETFs to overestimate the disinflationary process and position for the price pressures to fall back to prepandemic levels, warned Tim Urbanowicz, head of research and investment strategy at Innovator ETFs. 

“The risk to see additional hikes probably outweighs the probability that you’re going to see cuts this year,” said Urbanowicz. 

See: ‘The Fed is way late and they’ve already screwed it up.’ This stock strategist is banking on gold, silver and Treasurys to weather a recession.

The divergence between the Fed and the financial markets has driven investors to move back to fixed-income ETFs, especially ultra short-term bond funds. Avoiding interest-rate volatility has replaced inflation protection to be at the forefront of investors’ playbooks, said market strategists.

The SPDR Bloomberg 1-3 Month T-bill ETF
BIL,
+0.02%
has seen over $86 million of inflows in the week to Wednesday, while the inflows over the past three months totaled nearly $5.3 billion. The iShares 0-3 Month Treasury Bond ETF
SGOV,
+0.01%
has recorded a total of $3.9 billion inflows over the same three-month period, according to FactSet data. 

“There is a lot of gravitation towards yield products,” said Urbanowicz. “The flows that we’re seeing on the shorter end of the yield curve continue to be prominent. Also other yield enhancement strategies are becoming extremely popular…as a way to really generate extra income.”

“Inflation was a fear for investors in prior years, and then sentiment has shifted towards interest-rate hikes and interest-rate sensitivity,” said Rosenbluth. “Investors want to manage their interest-rate sensitivity, and in particular, still have a focus on Treasury ETFs given the debt-ceiling crisis, and given what’s going on with inflation.” 

Another example is BondBloxx Bloomberg One Year Target Duration U.S. Treasury ETF
XONE,
-0.02%,
which made its debut in September 2022. The fund has attracted over $514 million of inflows in the past week, and is among the top five ETFs that gathered maximum capital in the week to Wednesday, per FactSet data. 

“It’s rare to see an ETF that new get that level of demand,” said Rosenbluth. 

As usual, here’s your look at the top- and bottom-performing ETFs over the past week through Wednesday, according to FactSet data.

The good…

…and the bad

New ETFs

• IndexIQ announced on Wednesday the launch of the IQ CBRE Real Assets ETF
  IQRA,
  -1.06%,
  an actively managed ETF across real estate and infrastructure equity securities, subadvised by CBRE Investment Management Listed Real Assets LLC.

• PIMCO said Wednesday that it launched the PIMCO Commodity Strategy Active ETF, which invests in a range of commodity-linked instruments and seek out “diverse sources of excess returns” by incorporating multifactor considerations such as storage costs of physical commodities and historic performance trends.

• J.P. Morgan Asset Management on Thursday announced the launch of two new ETFs: JPMorgan BetaBuilders Emerging Markets Equity ETF
  BBEM,
  
  and JPMorgan BetaBuilders U.S. TIPS 0-5 Year ETF
  BBIP,
  .
  BBEM seeks investment results that closely correspond to the performance of the Morningstar Emerging Markets Target Market Exposure Index SM, while BBIP tracks the performance of the ICE 0-5 Year U.S. Inflation-Linked Treasury Index.

Weekly ETF reads