Two ETFs to consider inflation for protection with a targeted duration

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Getting inflation protection is one thing, targeting duration is another. Both can be accomplished with the FlexShares iBoxx 3 years Target Duration TIPS Index Fund (TDTT) and the FlexShares iBoxx 5 years Target Duration TIPS Index Fund (TDTF).

As consumer prices rise this year, fixed income investors can prepare for further moves with Inflation-Protected Treasury Securities (TIPS). However, for the savvy fixed income investor who wants to limit their time in TIPS in the event of falling consumer prices, TDTT and TDTF can accomplish just that.

“Inflation protection is a popular investment strategy for many investors,” said a FlexShares Fund Focus. “And in their quest for inflation-hedging investments, Inflation-Protected Treasury Securities, or TIPS, are often the first choice of investors.”

“However, investors using TIPS should consider the duration of these securities, a key measure of sensitivity to fluctuations in interest rates,” said FlexShares. “We believe that targeting a specific duration based on a portfolio’s interest rate exposure is essential to successfully hedge against the threat of inflation. That being said, TIPS present more challenges for duration management than most other fixed income investments. “

First, TDTT seeks to provide investment results which, before fees and expenses, generally match the price and return performance of the iBoxx 3-Year Target Duration TIPS Index. The underlying index reflects the performance of a selection of TIPS with a target adjusted average duration, as defined by the index provider, of approximately three years.

The second option, TDTF, seeks to provide investment results that generally match the price and return performance of the iBoxx 5-Year Target Duration TIPS Index. Like TDTT, the Underlying Index reflects the performance of a selection of TIPS.

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Focus on Modified Adjusted Duration (MAD)

One of the advantages of both ETFs is that they do not rely solely on the advantages of simply owning TIPS. The secret sauce has to do with what FlexShares calls Modified Adjusted Duration (MAD).

“TIPS obligations require a unique duration metric called modified adjusted duration (MAD) to judge their performance against the larger fixed income market, ”said FlexShares. “MAD is the market’s estimate of the term of a TIPS bond based on inflation expectations at that time. Since inflation expectations are highly variable, the MAD of a TIPS bond can change quickly.

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