MW Investors are rushing to buy TIPS ETFs to beat inflation. They could end up losing.
By Isabel Wang
TIPS are meant to protect against inflation - but ETFs stuffed with them can be vulnerable when you need them most
Inflation-protection funds are not the all-encompassing safety net investors might think they are.
Inflation-protected funds don't always protect against inflation.
With the consumer-price index hitting a three-year high in April due to the oil shock from the Iran war, the premise in their name is once again being tested.
Many of the most popular exchange-traded funds tracking the performance of Treasury inflation-protected securities, or TIPS, have been under pressure ever since the U.S. and Israel launched their war on Iran in late February.
The largest such fund, the $15 billion Schwab U.S. TIPS ETF SCHP, has fallen 1.2% since Feb. 28, while the iShares TIPS Bond ETF TIP is off 1.4% and the State Street SPDR Portfolio TIPS ETF SPIP has dropped 2% during the same period, according to FactSet data.
A price decline of less than 2% for a TIPS ETF since the Iran conflict began isn't dramatic on its own. But for a type of fund with the word "protected" in its name, it exposes a potentially bigger problem: Everyday investors might not fully understand what type of protection they are actually getting.
The issue is especially striking right now, given the high degree of uncertainty around the Iran conflict, the federal budget deficit and how high inflation might go. Fund flows this year suggest investors are leaning more heavily into TIPS ETFs, which can be easily traded.
"Buying a TIPS ETF isn't the same as buying a TIPS bond," said Dan Lockwood, wealth manager at Lockwood Wealth Management of Steward Partners. "You don't hold a fund to maturity, so you have a significant probability of getting less principle back."
Investors can simply hold individual TIPS until maturity to get their full, inflation-adjusted initial investment back. But a TIPS ETF doesn't come with that guarantee, since the funds don't often hold a single bond to maturity. Instead, investors can trade in and out of these ETFs daily, despite their underlying portfolios being backed by securities with maturities of five, 10 and 30 years.
While TIPS are designed to be protected against inflation, they are bonds first and foremost. The prices of TIPS fall when interest rates rise. When that happens, there is no guarantee investors will get all their money back unless they hold TIPS to maturity. By stripping away that maturity safety net, the ETF wrapper can leave investors with continuous exposure to interest-rate volatility and turn what's designed to be an inflation shield into a more speculative market trade.
Regular Treasury bonds make fixed interest payments plus the full initial investment when held to maturity. That differs from TIPS that have principal values that rise or fall with the consumer-price index. TIPS also tend to start at lower interest rates than Treasury notes and bonds. The most recent 10-year Treasury BX:TMUBMUSD10Y auction came at a 4.375% rate, compared with 1.875% for a recent 10-year TIPS, according to TreasuryDirect.
When inflation is heating up, TIPS should help by allowing investors to preserve purchasing power. However, TIPS can lose value before they mature when the Federal Reserve needs to hike interest rates to fight hot inflation.
When interest rates climb, older TIPS can become less attractive than newly issued bonds offering higher yields. In this case, for any investor holding individual TIPS to maturity, that price drop is only a paper loss, and they still receive a guaranteed inflation-adjusted payout. But if they invest in a TIPS fund, its market value can decline because the underlying bonds are constantly traded due to changes to interest rates.
That dynamic blindsided investors in 2022, when many TIPS funds posted double-digit losses at the very moment investors needed them the most. That wasn't what investors expected and yet there it was, showing up exactly when the stakes were the highest.
"When inflation spiked in the wake of COVID-19, a lot of investors rushed for TIPS funds, not realizing that the Fed's aggressive response on interest rates would leave them exposed to duration risk," said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities. "That cut into investors' returns, so a lot of investors were unpleasantly surprised back in 2022."
BlackRock's $(BLK)$ iShares TIPS Bond ETF delivered negative total returns of more than 12% in 2022, compared with the 13% losses for the iShares Core U.S. Aggregate Bond ETF AGG. Schwab's U.S. TIPS ETF also saw a negative total returns of over 6%, versus the roughly 10% losses for its U.S. Aggregate Bond ETF SCHZ, according to FactSet data. The Fidelity Inflation-Protected Bond Index Fund FIPDX, which is not an ETF, also booked a negative 12.1% return in 2022.
Schwab and BlackRock didn't immediately respond to a MarketWatch request for comment.
That's why analysts are cautioning that history could repeat itself in 2026, particularly as resurgent inflation fears drive fresh interest in TIPS ETFs. BlackRock's TIP ETF has seen more than $1 billion in net inflows so far in 2026, compared with net outflows of $261 million during the same period last year. Schwab's SCHP also recorded total net inflows of $863 million , versus $685 million last year, according to FactSet data.
To be sure, U.S. households are no longer flush with the excess savings built up during the pandemic era. Several years of restrictive interest rates, Trump's tariffs and high gas prices from the U.S.-Iran conflict have eroded those savings. Consumers also have never felt this gloomy about the U.S. economy before.
Still, Goldberg of TD Securities said TIPS ETFs may see "better returns this time around," given that the Fed is less likely to "embark on a very aggressive hiking cycle."
Kevin Flanagan, head of investment and fixed-income strategy at WisdomTree, thinks persistent interest-rate uncertainty could still leave TIPS ETFs exposed to "structural risks" that may not be fully recognized by everyday investors.
If investors want to "hedge or mitigate interest-rate risks," Treasury floating-rate notes "make the most sense in this environment," Flanagan told MarketWatch, because the fixed coupons of 2-year BX:TMUBMUSD02Y through 30-year BX:TMUBMUSD30Y Treasurys have been negative since Feb. 27.
WisdomTree manages the WisdomTree Floating Rate Treasury Fund USFR, which is up 0.1% on the year through Wednesday, according to FactSet data.
-Isabel Wang
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May 27, 2026 15:29 ET (19:29 GMT)
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