ProShares is continuing to build out its suite of ETFs offering exposure to alternatives, announcing this week the launch of a pair of funds designed to offer exposure to “breakeven inflation.” That term refers to the spread difference in yield between Treasuries and TIPS (i.e., the yield on Treasuries less the yield on TIPS of comparable duration), which is one measure of the rate of inflation that is expected from the market. The two new ETFs are:
- ProShares 30 Year TIPS/TSY Spread (RINF): This ETF seeks to deliver results that correspond to the performance of the Dow Jones Credit Suisse 30-Year Inflation Breakeven Index. That benchmark consists of a long position in the most recently issued 30 year TIPS bond and short positions in U.S. Treasuries of the closest maturity.
- ProShares Short 30 Year TIPS/TSY Spread (FINF): This ETF seeks to deliver daily returns that equal -1x of the daily change in the Dow Jones Credit Suisse 30-Year Inflation Breakeven Index.
The structure of RINF means that this product should appreciate as the “breakeven” rate of inflation increases. In other words, RINF should perform well when the yield on Treasuries increases relative to the yield on TIPS. Because the index consists of both long and short positions in long-dated bonds, the interest rate risk is essentially netted out. That leaves exposure to expectations on inflation; if the market’s expectations for inflation accelerate, it can be expected that demand for TIPS would increase (which would push yields down and prices up). In that scenario, RINF would be expected to perform well. Conversely, if market expectations for future inflation declined demand for TIPS would fall off, which would push up the price of those securities.
For investors concerned about the adverse impact of an uptick in inflation on their portfolios, the methodology employed by RINF could be more appealing than simply utilizing TIPS. Because TIPS are bonds, they are subject to interest rate risk; rising rates puts downward pressure on prices. Because interest rate hikes are often a result of rising inflation, that can limit the effectiveness of TIPS as an inflation hedge over the long term. The combination of long and short positions in RINF removes the noise related to duration of fixed income securities, allowing for the isolation of a single factor: Changes in the market’s expectations for inflation.
“Many investors are focused on inflation and closely follow breakeven inflation, a common yardstick for inflation expectations,” said Michael L. Sapir, chairman and CEO of ProShare Advisors LLC, ProShares’ investment advisor. “We are pleased to offer investors the first ETFs linked to this important economic indicator.”
FINF essentially takes the opposite side of the inflationary coin, as this product is designed to appreciate when the market’s expectations for inflation are tempered. It should be noted that FINF offers inverse exposure to the underlying index on a daily basis, meaning that returns over multiple trading sessions won’t necessarily correspond to the index over the same time period.
Inflation ETFs In Focus
FINF and RINF are part of the lineup of ETPs designed to combat inflation to debut in recent years. PowerShares and Deutsche Bank recently teamed up on a pair of products (INFL and DEFL) that implement a similar approach of combining long and short positions in TIPS and long-term Treasuries.
There are also multiple “real return ETFs” on the market that seek to beat inflation. WisdomTree’s actively-managed Real Return Fund (RRF) combines domestic and international TIPS with an advanced commodity futures strategy. IndexIQ’s Real Return ETF (CPI) combines a core holding in short-term bonds with satellite positions in other asset classes, including stocks, longer-term bonds, commodities and currencies.
With the addition of RINF and FINF, ProShares’ suite of “specialty” ETFs has grown to six products, including:
- Short VIX Short Term Futures (SVXY)
- Ultra VIX Short Term Futures (UVXY)
- VIX Mid-Term Futures (VIXM)
- VIX Short-Term Futures (VIXY)
Disclosure: No positions at time of writing.
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