Key Points

Treasury Inflation-Protected Securities are designed as a hedge against inflation.
TIPS, as they are known, offer interest payments that vary with inflation.
Inflation-proof investments help protect a well-rounded portfolio.

I would love to be one of those composed investors. Yet the reality is that I tend to worry. Although I have no desire to halt my overall portfolio, I seek methods to limit risks. Recently, inflation has occupied my thoughts, which makes me especially thankful for Treasury Inflation-Protected Securities (TIPS), particularly those held in a strong exchange-traded fund (ETF).

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Similar to other ETFs, TIPS ETFs are investment vehicles that combine your funds with those of fellow investors to acquire a varied collection of TIPS. These ETFs are listed on major stock exchanges, enabling you to purchase and sell shares in the same manner as ordinary stocks.

A benefit of TIPS ETFs lies in their simplicity of access and liquidity. Pair that with inherent inflation protection, and it becomes clear how TIPS ETFs integrate smoothly into the diversified portfolio of anyone concerned about inflation diminishing their investments.

How TIPS function

Whereas conventional bonds deliver a set interest rate, TIPS interest payments connect directly to inflation. When inflation increases, the principal value rises, resulting in larger interest payments. Conversely, if deflation takes place, the TIPS principal value may decline. Still, it is assured never to drop below its initial value at maturity.

Put simply, TIPS prevent inflation from diminishing your investment.

What renders TIPS so appealing

Thus far, it has proven difficult for me to find much about TIPS ETFs that would discourage me from including one in my portfolio. Here is an overview of what makes them appealing for investors seeking a degree of security during uncertain periods.

Inflation hedging: If you focus on inflation-proof investments, you will value how TIPS ETFs act as a shield against inflation. As grocery and gas prices climb due to inflation, so do the fund's interest payments and the worth of the securities it contains.
Diversification: TIPS ETFs deliver immediate diversification across numerous issuers and maturities. This diversification lowers the risk tied to investing in single securities.
Liquidity: Unlike buying TIPS outright, TIPS ETFs can be exchanged throughout the trading day, offering greater convenience when needed.
Low expense ratio: Most TIPS ETFs feature relatively low management fees, particularly compared to mutual funds.

Performance counts

A fund needs to be more than merely a hedge against inflation. As with all portfolio matters, there must be room for growth. One TIPS ETF that I am currently considering is the iShares U.S. Treasury Bond ETF. With a 30-day SEC yield of 4.37 percent and a 12-month trailing yield of 3.61 percent (as of July 7), the fund has delivered a steady income stream. Combined with its 0.05 percent expense ratio, it offers a low-cost approach to investing in U.S. Treasury securities.

Nothing is flawless, and TIPS ETFs are no different

Although I favor TIPS ETFs, two important considerations remain.

In a deflationary setting or during times of low inflation, TIPS ETFs may lag.
The interest income from TIPS is subject to federal income tax, which can influence overall returns.

A TIPS ETF cannot stop inflation, yet it can safeguard part of my money.