Comments on: Individual TIPS vs. TIPS Funds

By: Mike

Mike — Thu, 26 Nov 2009 06:23:04 +0000

Hi Daniel.

I wouldn’t count on it happening regularly. Basically, what happened to create the large returns from Vanguard’s TIPS fund was that interest rates declined significantly on treasury bonds, driving up the price of the bonds that the fund already owned.

Of course, in any given year, the opposite thing could happen, which is what makes long-term TIPS an unsafe investment for short-term investing, even though they’re pretty much the safest thing possible for long-term investing.

By: Daniel

Daniel — Thu, 26 Nov 2009 06:09:34 +0000

How can a TIPS Fund, e.g. Vanguard, yield larger returns than TIPS.
How do the TIPS fund get 11% return when TIPS do 2%

By: Mike

Mike — Wed, 22 Jul 2009 22:09:21 +0000

“Thanks Mike, it looks like I’ve done one better than the master oblivious investor himself by finding a super index fund?”

Hehe.

“Also, anyone know why TIPS funds go DOWN in value?”

Yep. While TIPS protect you from inflation, they don’t protect you from changes in market interest rates. Just like any other bond, a TIPS will decrease in market value if market interest rates increase. (And therefore the same thing occurs with funds that hold TIPS.)

By: MoneyNing

MoneyNing — Wed, 22 Jul 2009 21:59:23 +0000

Thanks Mike, it looks like I’ve done one better than the master oblivious investor himself by finding a super index fund?

Also, anyone know why TIPS funds go DOWN in value? I’m trying to find an alternative to my short term savings (I need it in one year or so) and I don’t want to risk capital depreciation (although I rather have a higher return than 2% for savings accounts + taxable at ordinary income levels)

By: Mike

Mike — Wed, 22 Jul 2009 21:53:00 +0000

Hi David (MoneyNing).

As to the differences, a couple obvious ones:
The ER for TIP is slightly lower than that of the Vanguard fund (0.2% rather than 0.25%).
By their nature, ETFs are generally more tax efficient than regular index funds.

Anybody else see any important ones I’m missing?

By: MoneyNing

MoneyNing — Wed, 22 Jul 2009 21:35:39 +0000

Perfect timing I too wonder about the tax consequences? I’ve been looking at TIP (Barclay’s ishares ETF for TIPS). Does anyone know what the difference is between this and the Vanguard fund that the Mike mentioned?

By: Rick Francis

Rick Francis — Wed, 22 Jul 2009 19:33:00 +0000

>there some considerations that I’ve left out?

Tax consequences? I suspect that the interest is taxed as ordinary income if that is the case then it really should be in a tax sheltered account.

-Rick Francis

By: Rob Bennett

Rob Bennett — Wed, 22 Jul 2009 17:09:11 +0000

I buy individual TIPS for the reason you state — I want to know the return.

I love TIPS, by the way. I think they are a better alternative to stocks than corporate bonds (which are usually put forward as the alternative). When I go with something other than stocks, I am seeking non-riskiness. I see TIPS as the least risky asset class imaginable because everything is known in advance — they have a government guaranty and inflation-protection.

I don’t like bonds as much because they do not protect from inflation risks. Bonds might generate better long-term returns. But when I am looking for high returns, I prefer stocks to bonds.

Rob