LTPZ: The Time Is Now (Maybe) (NYSEARCA:LTPZ)

ryasick Treasury Inflation Protected Securities, or TIPS, have gotten some strong attention in the last few years, and I think it’s fair to say that the results have been mixed. Not because of the inflation protection, but rather because of duration. The fact that we went through such a vicious duration bear market thanks to the fastest rate hike cycle in history resulted in the duration weakness of some TIPS funds having returns that countered the inflation protection. The good news is? That dynamic is unlikely to persist. This actually means long-duration TIPS might make sense here. If you’re of the same mindset, you may want to consider the PIMCO 15+ Year U.S. TIPS Index Exchange-Traded Fund ETF (NYSEARCA:LTPZ). This fund targets inflation-indexed securities, and hedges against inflation, and seeks to protect purchasing power in an era of rising markets and inflation where rates are likely to start falling. And that’s the world we are entering. LPTZ tries to track the ICE BofAML 15+ Year US Inflation-Linked Treasury Index, giving investors long-maturity TIPS exposure. The basic goal of LTPZ is to deliver real returns (over and above inflation), along with protection of principal, and with sensitivity to movements in real interest rates. A Look At The Holdings One could always buy TIPS individually from Treasury Direct. However, the nice thing is the fund does what it does to make it not just easier for investors, but also targets a constant longer duration tilt, rebalancing along the way for a constant maturity profile. pimco.com Each of these positions is inflation-indexed Treasury bonds with different maturities and coupons. In aggregate, the effective duration is 18.92 years across 17 holdings, which, of course, means that the fund will respond positively to falling rates, and negatively to rising ones. Inflation protection is a different component of the total return. Buying duration and inflation protection here given the Fed telegraphing a cutting cycle makes sense to me. Peer Comparison One fund worth comparing LTPZ to is the iShares TIPS Bond ETF (TIP). This fund is targeting the same area of the Treasury market, but with a much shorter duration at 6.53 years. When we look at the price ratio of LTPZ to TIP, we find that LTPZ has badly underperformed since 2022. Again – this makes sense because of the longer duration profile of LPTZ. Notice the ratio does appear to be turning, though, which suggests duration may be at a cycle low. StockCharts.com Pros and Cons On the plus side, LTPZ has a few attractive features. To start, the fund’s direct investment in long-maturity TIPS provides a valuable hedge for investors against persistent periods of inflationary pressures – a hedge for their purchasing power over the long term. The low costs of LTPZ, combined with the automatic diversification benefits of investing in TIPS, can also contribute to a well-balanced portfolio. But there are negatives, of course. Long-maturity TIPS can be more volatile than shorter maturities because the prices of real Treasury inflation notes (or real bonds) highly depend on real interest-rate movements. Second, the fund’s concentrated focus on only part of the TIPS market can avoid diversification within the fixed-income allocation. Remember that all bonds have interest-rate risk exposure, and most bonds can be influenced by macroeconomic factors and market sentiment. The other negative may actually be the inflation protection itself. Everyone is under the assumption that we are in an era of elevated inflation, but what if we aren’t? If that’s the case, you’d actually want pure Treasuries WITHOUT inflation-linked behavior. Any kind of deflation scare means the fund would likely do well because of duration alone, but underperform nominal long duration Treasuries that are not TIPS. Conclusion In an era of persistent inflation, the PIMCO 15+ Year U.S. TIPS Index Exchange-Traded Fund ETF gives you the benefit of direct exposure to long-maturity TIPS with their enhanced protection against rising prices. This is along with their great potential for generating real yields. I like the fund, the asset class, and the duration here, and think it’s worth considering an allocation to LTPZ. The cycle is shifting, and that can be a big positive for the fund.Get 50% Off The Lead-Lag ReportAre you tired of being a passive investor and ready to take control of your financial future? Introducing The Lead-Lag Report, an award-winning research tool designed to give you a competitive edge.The Lead-Lag Report is your daily source for identifying risk triggers, uncovering high yield ideas, and gaining valuable macro observations. Stay ahead of the game with crucial insights into leaders, laggards, and everything in between.Go from risk-on to risk-off with ease and confidence. Get 50% off for a limited time by visiting https://seekingalpha.com/affiliate_link/leadlag50percentoff. 

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