Vanguard on July 24 filed paperwork with the SEC to launch the Vanguard Short-Term Inflation-Protected Securities Index Fund, and it will come in traditional Investor and Admiral mutual fund varieties – along with an ETF. This fund will track the Barclays U.S. Treasury Inflation-Protected Securities (TIPS ) 0-5 Year Index, and invest in TIPS that have a remaining maturity of less than five years.
The fund is expected to launch around Oct. 10, 2012. The mutual funds will impose a 0.25% purchase fee (which doesn’t apply to reinvested dividends and capital gains). This fee benefits current shareholders, and is designed to discourage short-term trading. ETF buyers will be exempt from this fee.
The management fee for the ETF is expected to be 0.1%, the same as for Admiral shares. So ETF buyers would get Admiral advantages without the 0.25% purchase fee.
Vanguard’s fund won’t be the first for short-term TIPS. Already launched are:
- iShares Barclays 0-5 Year TIPS Bond Fund (STIP), which tracks the same index, with a 0.2% expense ratio.
- The Pimco 1-5 Year US TIPS Index ETF (STPZ), linked to the BofA Merrill Lynch 1-5 Year US Inflation-Linked Treasury Index. It also has an expense ration of 0.2%.
So the Vanguard ETF will have the advantage in expenses, although slight. However, with the very low returns this fund will offer, that little advantage makes a difference.
Here is how the iShares fund has performed against the Pimco fund over the last year. Keep in mind that the iShares fund will use the same index as Vanguard’s:
These funds are not going to pay much in dividends, in fact, buyers can expect negative returns to inflation over the short term, and possibly much longer. The current 30-day yield on STIP is -0.22%.
Vanguard notes the fund is designed for low-risk investors, but still carries risks:
Income fluctuations. The Fund’s quarterly income distributions are likely to fluctuate considerably more than the income distributions of a typical bond fund. Income fluctuations associated with changes in interest rates are expected to be low; however, income fluctuations associated with changes in inflation are expected to be high. Overall, investors can expect income fluctuations to be high for the Fund.
Interest rate risk, which is the chance that the value of a bond will fluctuate due to a change in the level of interest rates. Although inflation-indexed bonds seek to provide inflation protection, their prices may decline when interest rates rise and vice versa. Because the Fund’s dollar-weighted average maturity is expected to be 5 years or less, interest rate risk is expected to be low for the Fund.