TIPS mutual funds: Overrated as a ‘safe harbor’?

Most bond funds, and especially Treasury funds, are considered a safe harbor during a time of stock market decline. But mutual funds and ETFs that hold Treasury Inflation-Protected Securities don’t always follow that pattern. The market value of TIPS is also influenced by inflation expectations, which puts a complex spin on their pricing.

If the stock market is going down because of economic fears – as it has been over the last month – then TIPS may underperform other bond funds. The reason: The fear of inflation is dwindling.

This chart shows how the TIPS ETF has fallen behind other benchmark bond funds:

The real safe harbor? I contend that buying Treasury Inflation-Protected Securities directly through, or through your broker in a retirement account, is a true safe harbor. This investment will produce a real return over inflation, and it is super safe.

TIPS mutual funds are a bit of a gamble. They have been an excellent investment over the last few years. But the market price of TIPS will go down if the base yield rises, and the base yield is at a historically low rate.


About Tipswatch

Author of blog, David Enna is a long-time journalist based in Charlotte, N.C. A past winner of two Society of American Business Editors and Writers awards, he has written on real estate and home finance, and was a founding editor of The Charlotte Observer's website.
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3 Responses to TIPS mutual funds: Overrated as a ‘safe harbor’?

  1. Dan says:

    Thanks much for your thoughts. The fear is that the S&P slides down with it and I’d have been better off with a 10% drop than at 25% drop! I can’t seem to understand the direct or indirect correlation to the large cap stocks. There seems to be no correlation?

    Thanks for nice site here!


  2. Dan says:

    Does your view change if the investment in TIPS mutual fund is in a 403b with time horizon of 5 or 10 years? I’d really like to reallocate money from S&P index fund to the FINPX but I’m worried about the NAV of the FINPX right now. Thoughts?

    • tipswatch says:

      The TIPS mutual funds – I don’t own any – have been doing spectacularly. FINPX is up 9.42% for the year. I think you are right to be cautious right now. But I was wrong about FINPX in the past — I shifted out in April and into a total bond fund (up 4.10% this year). TIPS yields have been falling sharply. Eventually that trend will break (I theorize) and you could see a reversal in FINPX. How much? I would guess the risk is less than 10%.

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