Assessing Mackenzie US TIPS Index ETF (CAD-Hedged) in a High-Interest-Rate, Inflationary Climate

In the current economic landscape, where inflation remains a persistent concern and central banks grapple with high-interest-rate environments, Canadian investors are increasingly seeking tools to preserve purchasing power. The Mackenzie US TIPS Index ETF (CAD-Hedged) (QTIP) has emerged as a compelling option, offering exposure to inflation-protected U.S. Treasury Inflation-Protected Securities (TIPS) while hedging currency risk. This article evaluates QTIP's dividend sustainability, inflation-adjusted returns, and relevance for Canadian investors navigating a high-rate regime.

Inflation-Protected Returns: A Dual-Edged Shield

TIPS are designed to adjust their principal in line with the U.S. Consumer Price Index (CPI), ensuring that investors' capital retains its real value during inflationary periods. The Mackenzie ETF's structure locks in this protection while hedging U.S. dollar exposure to CAD, a critical feature for Canadian investors. As of July 2025, the ETF's trailing twelve-month (TTM) yield stands at 4.51%, outperforming traditional fixed-income alternatives like the iShares DEX Real Return Bond (XRB), which offers a real yield of just 0.30%.

However, the ETF's dividend history reveals volatility. For instance, the July 2025 payout of $0.351 per share (0.418% yield) contrasts sharply with a February 2025 payout of $0.0857 per share (0.102% yield). This variability reflects the ETF's dependence on CPI-driven principal adjustments and the sensitivity of TIPS to real interest rate movements. While the fund's inflation-adjustment mechanism is robust, its dividend sustainability hinges on macroeconomic conditions.

Navigating High-Interest-Rate Environments

In a high-rate regime, TIPS face dual pressures: rising inflation (which boosts their principal) and higher real yields (which can depress their market value). QTIP's effective duration of 8.05 years means its price will decline by approximately 8% for every 1% increase in real interest rates. This sensitivity contrasts with shorter-duration TIPS ETFs like ZTIP (duration: 2.65 years) but positions QTIP to benefit more from sustained inflation.

For Canadian investors, the CAD-hedging feature is a key differentiator. Unlike unhedged TIPS ETFs, QTIP mitigates the risk of U.S. dollar depreciation against the Canadian dollar, which could otherwise erode returns. This is particularly relevant as the Bank of Canada's inflation-targeting policies and U.S. Federal Reserve's rate decisions create divergent currency pressures.

Comparative Advantages for Canadian Investors

Traditional real return bonds (RRBs) like XRB and ZRR, while inflation-protected, suffer from long durations (15–16 years) that amplify losses in rising rate environments. For example, a 0.5% rate increase could slash XRB's value by 8%. In contrast, QTIP's shorter duration and U.S. inflation linkage provide a more balanced approach.

The ETF's cost efficiency also strengthens its appeal. With a 0.17% management expense ratio (MER), it is competitive with other TIPS ETFs and significantly cheaper than RRBs like XRB (MER: 0.50%). This cost advantage becomes critical in a low-yield environment, where fee drag can eat into returns.

Dividend Sustainability: A Cautious Outlook

While QTIP's dividend is tied to the underlying TIPS' inflation-adjusted principal, its sustainability is not guaranteed. The fund's dividend growth rate has declined by 41.89% over the past year, reflecting the challenges of maintaining payouts amid volatile CPI data and interest rate uncertainty. Investors should view QTIP's distributions as variable income streams rather than fixed returns.

For comparison, Mackenzie's Core Plus Global Fixed Income ETF (MGB.TO) has demonstrated stable monthly distributions in 2025, thanks to its active management and high-quality bond focus. However, QTIP's passive, inflation-protected structure caters to a different segment of the market—one prioritizing capital preservation over income consistency.

Strategic Considerations for Investors

1. Inflation Expectations: QTIP thrives in environments where inflation remains elevated. If the Bank of Canada or U.S. Federal Reserve signals prolonged inflation, the ETF's TIPS holdings will adjust favorably.
2. Interest Rate Scenarios: Investors should monitor real yield trends. A sharp rise in real rates (e.g., due to aggressive rate hikes) could depress QTIP's NAV, offsetting inflation-linked gains.
3. Diversification: QTIP is best suited as part of a diversified portfolio, complementing short-duration bonds or GICs to balance inflation protection with rate risk mitigation.

Conclusion: A Prudent Inflation Hedge

The Mackenzie US TIPS Index ETF (CAD-Hedged) offers a compelling blend of inflation protection, currency hedging, and cost efficiency for Canadian investors. While its dividend sustainability is subject to macroeconomic volatility, its structural advantages—particularly in a high-interest-rate environment—make it a valuable tool for preserving purchasing power. For those prioritizing long-term capital resilience over predictable income, QTIP warrants serious consideration. However, as with all investments, due diligence on inflation forecasts and rate trajectories is essential to align with individual risk profiles.