New ETF entries … International TIPS funds

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
Coupon Maturity Moody’s/S&P Rating
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
Total 49.63%

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.


About Tipswatch

Author of blog, David Enna is a long-time journalist based in Charlotte, N.C. A past winner of two Society of American Business Editors and Writers awards, he has written on real estate and home finance, and was a founding editor of The Charlotte Observer's website.
This entry was posted in Inflation, International bonds, Investing in TIPS. Bookmark the permalink.

1 Response to New ETF entries … International TIPS funds

  1. Pingback: ITIP ETF: How risky is it? | Treasury Inflation-Protected Securities

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