IShares this month launched two new international bond funds with inflation protection: IShares Global Inflation-Linked Bond Fund (GTIP) and iShares International Inflation-Linked Bond Fund (ITIP). Both funds track indexes of government-issued bonds; the main difference is that GTIP includes U.S. Treasuries in the mix while ITIP excludes U.S. bonds.
The more intriguing investment is ITIP, since there are easy ways to buy and hold U.S. Treasury Inflation Protected Securities to maturity. Also, in my opinion, mutual funds and ETFs that track the U.S. TIPS market are near five-year highs and thus somewhat risky.
ITIP’s makeup looks like this (see all holdings):
% of Fund
|UNITED KINGDOM OF GR||9.90%||4.12||7/22/2030||Aaa /AAA|
|BRAZIL, FEDERATIVE R||6.94%||6.00||5/15/2013||Baa3 /NR|
|ITALY, REPUBLIC OF (||5.82%||2.10||9/15/2016||NR /NR|
|FRANCE (GOVERNMENT)||5.77%||1.10||7/25/2022||Aaa /NR|
|GERMANY (GOVERNMENT||4.39%||1.50||4/15/2016||Aaa /AAA|
|FRANCE (GOVERNMENT)||4.32%||0.45||7/25/2016||Aaa /NR|
|AUSTRALIA, COMMONWEA||3.24%||4.00||8/20/2020||Aaa /NR|
|TURKEY, REPUBLIC OF||3.12%||3.73||10/1/2014||NR /NR|
|CANADA GOVT||3.07%||4.25||12/1/2026||TSY /TSY|
|UNITED KINGDOM OF GR||3.04%||2.50||7/26/2016||Aaa /AAA|
Risk. This fund is definitely more risky than U.S Treasuries, with Italian, Greek and Turkish bonds in the mix. But the risk is lessened by the diversification.
Fees. The management fee for ITIP is 0.4%, which is double the fee of iShares TIPS ETF tracking the U.S. TIPS market.
Duration. The duration of ITIP is 8.51, versus 4.5 for the TIP, so there is more interest-rate risk. (About 68% of the holdings in TIP are 10 years or less, while for ITIP that number is 56%.)
Yield. Determining yield on a TIPS fund is impossible, since inflation will determine the future results. IShares says this for the ‘real yield,’ which ignores the inflation adjustment:
ITIP = Average Real Yield to Maturity 2.20%
TIP = Average Real Yield to Maturity 0.28%
Volume. If you are interesting in investing in ITIP, heed this warning: Place a limit order. The volume on this ETF is extremely light, since it just launched and has no track record. The average daily volume so far is only 1,650 shares a day. There are only 100,000 shares outstanding, versus 184,900,000 for the TIP ETF. That is a red flag for an ETF investor.
Price. In addition, ITIP was trading above its NAV last week ($50.16 versus $49.77), which can happen with a lightly-traded ETF.
Positives of ITIP = Better yield, diversification, international investment.
Negatives of ITIP = Riskier, light volume, foreign currency risk.
Conclusion. ITIP looks like an interesting ETF for diversifying your inflation-protected bond holdings. It has no track record, however, and is lightly traded. This is appropriate only for small investments.