As investors seek protection from sharp increases in global prices, demand for inflation-linked bond exchange-traded funds has been soaring in recent months.

According to data from London-based consulting firm ETFGI, the global net investor inflow of so-called linked ETFs in the first nine months of 2021 was US$31.7 billion, more than double the US$15.7 billion attracted throughout the year.

According to ETFGI data, as of the end of September, the total assets held by inflation-linked ETFs had increased to 114 billion U.S. dollars, an increase of 39.5% from the 81.7 billion U.S. dollars at the end of last year.

Deborah Fuhr, the founder of ETFGI, attributed this sudden shift to the recent surge in the global cost of living. “Investors’ concerns about inflation are driving capital inflows into inflation-linked bond ETFs,” she said.

US$114 billion

As of the end of September, the total assets of inflation-linked ETFs increased by 39.5% from the $81.7 billion at the end of last year

These concerns have now reached such an extent that, before flowing into traditionally more popular categories (such as corporate bonds, high-yield bonds, and emerging markets), funds flowed into inflation-linked bond ETFs (previously regarded as investments by most investors). Niche products in the portfolio) Fuhr pointed out that ETFs.

Michael John Lytle, chief executive of Tabula Investment Management, a fixed-income ETF provider, said these capital flows only highlight how difficult the current situation for bond investors is. He pointed out that when the so-called experts are powerless, they are facing a period of high uncertainty.

“Economy is not very good at expanding rapidly with unknown dynamics,” Lighter observed-referring to the rebound after the Covid-19 pandemic caused a global contraction. He added that the world has entered a stage where “forecasters” are actually “speculating when prices will fall again.”

“Anything is possible,” Leiter said. “What has happened in the past few months is that seers are everywhere.” He pointed out that there is usually more consensus.

“As a result, investors need inflation hedging tools that they have never needed before,” he added.

However, ETF investors also need to have a certain understanding of how the underlying linked securities operate so that they can understand what kind of protection they are buying.

Inflation-protected ETFs usually provide protection options based on realized or expected inflation. The achieved inflation protection is provided by products that track simple U.S. Treasury inflation protection securities (Tips) or other inflation-linked bonds that track consumer price index data. Therefore, hints and similar linkers are looking backwards because they are based on bonds associated with reported inflation indicators.

Alternatively, investors can choose to invest in an ETF that tracks an index of inflation expectations, also known as the break-even ratio.

Tabula believes that its US Enhanced Inflation Ucits ETF (TINF) is unique in providing exposure to both.

When choosing an inflation-protected ETF, investors must also consider the duration of the underlying securities. “The longer the tool lasts, the greater your exposure to changes in interest rates,” Lighter explained. Much depends on how long investors plan to keep investing and whether they believe the current sharp rise in inflation will be temporary or deep-rooted.

The market’s perception of this has been changing rapidly.For example, short-term government bond yields Soaring in October, Because the market began to digest the expected interest rate hike by the central bank.

In recent months, medium-term bond funds have been the first choice of investors.

The iShares TIPS Bond ETF worth US$35.7 billion (hintAccording to CFRA data, the company invests in bonds with a range of maturities, attracting most of the money to the inflation-protected bond ETF. In the year ended October 21, the company’s investment amounted to 8.4 billion U.S. dollars. At the end of October, the weighted average maturity held by iShares funds (the largest inflation-protected ETF in terms of assets under management) was approximately 8 years. Bonds with maturities of 3-5 years account for the largest proportion of the investment portfolio, approximately 23%, but nearly 16% of the portfolio is bonds with maturities of more than 20 years. The fund does not hold bonds with maturities of 10-15 years.

Charles Schwab’s US$21.4 billion U.S. Tips ETF (Cogeneration)-CFRA regards it as another linker ETF with a weighted average maturity of approximately 8 years-ranking third in terms of inflows. During the same 12-month period, it accumulated US$6.7 billion.

Investors need inflation hedging tools they have never needed before

Two short-term bond ETFs ranked second and fourth respectively. Pioneer short-term inflation-protected securities ETF valued at $18 billion (joke) Attracted US$7.4 billion, and the US$7.4 billion iShares 0-5 Year Tips Bond ETF (Institute of Science and Technology) Attracted an inflow of US$4.2 billion.

In contrast, Pimco’s 880 million U.S. tipping index exchange trade fund over 15 years (Low poly zone), valid for more than 23 years, only attracted 120 million U.S. dollars.

Although inflation has always been the headline news, analysts have not advised investors to transfer a large part of their portfolio to ETFs to prevent price increases.

“This is not about repositioning your portfolio as a 50% inflation product. That’s crazy,” Lighter said. He suggested that investors should still try to build a portfolio that they believe will produce the best return.

Todd Rosenbluth, head of ETF and mutual fund research at CFRA Research in New York, agrees that linker ETFs should only be part of the deployment strategy. “Inflation-protected ETFs are great for a portion of your fixed income exposure,” he said. His suggestion is that investors consider using these products for exposure to some US Treasury bonds – or as a substitute for existing exposures.