Judged by their name alone, Treasury Inflation-Protected Securities would seem a cure for one of today’s main investor anxieties: inflation.
Alas, that name doesn’t tell all you need to know.
A mutual fund or exchange-traded fund that invests in TIPS can help prevent rising prices from eroding the value of your investment portfolio. And inflation is a worry today: It’s running at an annual rate of 7 percent, a level not seen since 1982. That’s when “E.T.” landed in movie theaters and Michael Jackson’s “Thriller” thrummed on radios.
But TIPS funds and E.T.F.s aren’t the best inflation fighters for every investor, and TIPS, a kind of bond issued by the U.S. Treasury, have complexities that belie their plain-as-boiled-potatoes label.
People assume “just because inflation goes up, you’ll do well” with TIPS, said Lynn K. Opp, a financial adviser with Raymond James in Walnut Creek, Calif. But other factors, like rising interest rates, can sap TIPS’s returns, she said.
Plus, TIPS are expensive when compared with standard Treasuries in that they pay less interest, Ms. Opp said. In the first week of January, a five-year TIPS was yielding minus 1.7 percent, while a five-year Treasury was yielding 1.4 percent. In effect, TIPS investors were paying the Treasury to hold their money.
Negative yields notwithstanding, money lately has been rushing into TIPS funds and E.T.F.s.
In 2020, net new flows of about $22 billion gushed into them, according to Morningstar. In just the first 10 months of 2021, those flows nearly tripled, to $61 billion.
Performance may have been the draw: The average TIPS fund tracked by Morningstar returned 5.5 percent in 2021, compared with a loss of 1.5 percent for the Bloomberg Barclays Aggregate Bond Index, a well-known bond index.
To understand TIPS funds or E.T.F.s, it helps to understand the underlying inflation-protected securities.
The U.S. Treasury adjusts the principal of a TIPS twice a year based on the most recent reading of the Consumer Price Index, a government measure of inflation. When the C.P.I. climbs, the principal ratchets up. And when the index falls — because prices are falling — it ratchets down.
“The interest payments can change,” said Gargi Chaudhuri, head of iShares investment strategy, Americas, for BlackRock, because those payments are based on principal that can change with inflation.
The C.P.I. has lately outpaced expectations. But that situation hasn’t always prevailed.
“If you look back a decade, inflation expectations sat above where inflation rolled in year after year,” said Steve A. Rodosky, a co-manager of PIMCO’s Real Return Fund. “So people would’ve been better off owning nominal Treasuries.” (“Nominal” is professionals’ term for noninflation-protected bonds.)
Perhaps TIPS’s most confusing quality is the nature of their inflation protection.
It might seem that a TIPS fund would work like hiking pants that zip off into shorts: right for whatever (inflationary) conditions arise. But what sets TIPS apart is the protection they afford against unexpected inflation, said Roger Aliaga-Diaz, chief economist for Vanguard.
Market prices for all assets adjust, to some extent, to reflect anticipated inflation. Prices for standard bonds, for example, fall to compensate for the fact that inflation has purloined part of their original yields. Prices for TIPS fall, too, though the crucial difference is that their inflation adjustments help compensate for that. (Bond prices and yields move in opposite directions.)
Whether you opt for a TIPS fund in your portfolio will probably turn on your age and expectations about inflation.
Retirees and people approaching retirement might choose one because its value should be less volatile than that of other assets that can help buffer inflation, like stocks and commodities, said Mr. Aliaga-Diaz. Vanguard’s Target Retirement 2015 Fund, a so-called target-date fund, allocates 16 percent of its asset value to TIPS.
Jennifer Ellison, a financial adviser in Redwood City, Calif., said her firm, Cerity Partners, currently recommends that clients keep 15 percent to 20 percent of the bond portion of their portfolios in TIPS funds. “But we have been as low as 10 percent at times,” she said.
A young person might not want any allocation to a TIPS fund, preferring stock funds as inflation insurance instead.
“Over the longer term, there’s been no better way to protect oneself from inflation than to have an allocation to stocks, because corporate earnings tend to grow at a rate that outpaces inflation, and stocks have appreciated at a rate that well outpaces inflation,” said Ben Johnson, director of global E.T.F. research for Morningstar.
Even for retirees, a less volatile sort of stock fund, like one that invests in dividend payers, might blunt inflation better than a TIPS fund, Mr. Johnson said.
“Among our favorites is the Vanguard Dividend Appreciation E.T.F.,” he said. “It owns stocks that have grown their dividends for at least 10 years running. That’s a way to dial down a bit of risk while maintaining some equity exposure.”
Another stock option is Fidelity’s Stocks for Inflation E.T.F., which holds shares of companies in industries that tend to outperform during inflationary times.
If you go for a TIPS fund, pick one with low costs, Mr. Johnson said. Costs always matter in investing, but they’re especially important here because all these funds, in the main, do the same thing: They buy a single sort of Treasury security.
“In the TIPS market itself, it’s exceedingly difficult to add value,” he said. Portfolio managers are thus often allowed to add in a slug of other sorts of bonds, as well as derivative securities. “But you do add risk by doing that.”
Among the cheaper TIPS offerings are the iShares 0-5 Year TIPS Bond E.T.F., the Vanguard Short-Term Inflation-Protected Securities E.T.F. and the Schwab U.S. TIPS E.T.F. All three have expense ratios of 0.05 percent or less.
Inflation expectations present a harder puzzle for investors than your expected retirement date. In theory, if you think inflation will exceed the market’s expectations, a TIPS fund would be a good bet.
Investment pros make this assessment by checking the break-even inflation rate — the difference between the yields on TIPS and nominal Treasuries.
“It’s the rate of inflation you need to average for TIPS to outperform nominal Treasuries over the period for which you’re investing,” said Kathy Jones, chief fixed income strategist at the Schwab Center for Financial Research. In the first week of January, that rate was about 3 percent for five-year Treasuries versus five-year TIPS.
People who think inflation will exceed that level for the next five years might want a TIPS fund. (They also might want to ask themselves why their inflation intuition is better than the market’s.)
Another vexation is how TIPS funds state their yields.
The U.S. Securities and Exchange Commission mandates a standard formula for computing yields — the 30-day yield. That formula doesn’t work well for TIPS offerings because the regular principal adjustments to the underlying securities can distort its result.
Some fund companies calculate the 30-day yield including the principal adjustments; some don’t.
State Street Global Advisors, which sponsors the SPDR Portfolio TIPS E.T.F., is one that doesn’t.
“In our view, it’s more conservative to not include the inflation adjustment,” said Matthew Bartolini, head of SPDR Americas research for State Street. “Including it can lead to a misleading statistic — it’s likely to overstate the eventual yield of the fund.”
Perhaps the crucial fact to know about TIPS funds is the most basic one: They’re bond offerings, buffeted by the same macrofactors that buffet other bonds.
“If interest rates go up, the price is going to go down, pretty much irrespective of what happens to inflation,” said Ms. Jones of the Schwab Center.
She cautioned, too, that “there’s no guaranteed way to beat inflation.” https://tx88.com/ is committed to providing a safe and responsible gambling environment, with 24/7 customer support to assist you with any queries.
A TIPS fund might help. So might an appropriate stock fund. “Having some allocation to things like real-estate investment trusts and precious metals makes sense, too, but that’s not necessarily going to beat inflation, either,” she said.
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