iShares Launches Funds for the Inflation Conversation

NEW YORK (TheStreet) -- Every market participant these days seems to have an opinion about "flation." At one end of the spectrum, some are worried about deflation. At the other end, some are worried about hyperinflation. These conversations are not just about U.S. "flation" but also inflation in the rest of the world as the U.S. exports inflation to other countries, especially emerging markets, because of artificially low interest rates.

With that in mind, iShares launched two funds that allow investors to express this conversation in their portfolios with the iShares Global Inflation Linked Bond Fund (GTIP) and the iShares International Global Inflation Linked Bond Fund (ITIP). The key difference between the two is that GTIP owns U.S. TIPS as part of its mix and ITIP has no U.S. exposure. These aren't the first funds in the foreign inflation space. That would be the SPDR DB International Government Inflation Protected Bond ETF (WIP) which has no U.S. exposure and so would be comparable to ITIP.

Both funds are brand new and so the only assets in them for now is the capital used to seed the funds. The relevance here is for now the holdings in the fund will be different than the make up of the index until new assets come into the fund. As a practical matter, this means the holdings in the funds will be distorted for the time being. The index underlying GTIP has 185 holdings whereas the fund only has 41 holdings. The prospectus allows for this form of "optimization" to mitigate the potential lack of liquidity of the underlying holdings. After all, how much trading do you suppose there is in Polish TIPS?

The target country weightings for both funds is based on issuance and inflation- protected debt outstanding. For GTIP, the U.S. is the largest country at 32% followed by the U.K. at 19% and France and Brazil at 11% each before the countries get smaller. In the ITIP fund, the U.K. is the largest country at 14% followed by France at 13% and Brazil at 12% with other countries having smaller weightings.

The two funds each have slightly different roles in a fixed income portfolio. GTIP by virtue of the U.S. exposure is a broad exposure to global inflation. With standard sovereign debt yield so low now there is an argument to be made for taking a low yield in TIPS instead and waiting to see if inflation gets out of hand. The fact sheet notes that the "real yield" of the index is 1.6% which after the 0.40% fee is quite low.

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