TIPS ETFs lose $43B as great inflation hedge unwinds

investmentnews.com:

The great market inflation hedge of the pandemic era is officially over. 

Between cash outflows and capital losses, the combined assets of the 10 largest US exchange-traded funds that focus on inflation-linked bonds have tumbled from a peak of more than $99 billion in early 2022 to around $57 billion. That’s about what they held in late 2020, before the outbreak of the nation’s first major consumer-price surge since the early 1980s.

The pullback underscores how confident investors are that the Federal Reserve has brought inflation back under control. That’s expected to be evident Tuesday, when economists predict the Labor Department will report that the annual increase in the consumer-price index pulled below 3% for the first time in roughly three years. In June 2022, it was rising at about three times that pace. 

The shift in sentiment isn’t surprising, given that Fed officials share investors’ confidence and anticipate that they will be able to start dialing back interest rates this year to avoid stifling the economy. And ETFs that cater to the investment trend of the moment typically see big pullbacks when investors move on to the next big thing.

“We experienced huge growth post-Covid,” Lindsay Rosner, head of multi-sector fixed income investing at Goldman Sachs Asset Management, said about the TIPS flows. “Now, growth feels soft-landing-ish and the need for inflation protection has been lessened. There is less of a demand for this style portfolio allocation.”

But some of the pullback may reflect another fact: The ETFs didn’t actually fare that well as a safeguard against inflation. 

While Treasury inflation-protected securities, or TIPS, provide additional payments to make up for the rise in consumer prices, they