Does the world really need more TIPS mutual funds?

Apparently so. State Street Global Advisors, the world’s second largest asset manager, says in a regulatory filing that it is launching two new ETFs based on Treasury Inflation-Protected Securities:

  • SPDR Barclays 0-5 Year TIPS ETF, which will track the Barclays 0-5 Year Government Inflation-linked Bond Index.
  • SPDR Barclays 1-10 Year TIPS ETF, which will track the Barclays 1-10 Year Government Inflation-linked Bond Index.

The filing does not reveal the ticker symbols or the expected management fees associated with each ETF. Let’s see if State Street can approach the 0.10% expense ratio of the Vanguard Short-Term Inflation-Protected Securities ETF (VTIP), which was launched in October 2012.

State Street currently provides an overall TIPS market ETF, the SPDR Barclays TIPS (IPE), with $740 million in assets and an annual expense ratio of 0.19%. But the giant here is the iShares Barclays TIPS Bond (TIP), with more than $21 billion in assets and an annual expense ratio of 0.20%.

Too many TIPS funds? Maybe not, but the surge in TIPS ETFs mirrors investors’ high interest in inflation protection, as the Fed pours cheap money into the economy, and the U.S. government fails to get deficits under control. ETFs often seem to be a lagging indicator — they rise up well after a sector goes hot.

Here’s a list from Yahoo Finance of currently available funds seeking inflation protection:

  • FlexShares iBoxx 3-Year Target Duration TIPS Index Fund (TDTT)
  • FlexShares iBoxx 5-Year Target Duration TIPS Index Fund Profile (TDTF)
  • Global Advantage Inflation-Linked Bond Exchange-Traded Fund (ILB)
  • iShares Global Inflation-Linked Bond Fund (GTIP)
  • iShares International Inflation-Linked Bond Fund (ITIP)
  • iShares Barclays Treasury Inflation Protected Securities Fund (TIP)
  • iShares Barclays 0-5 Year TIPS Bond Fund (STIP)
  • PIMCO Broad U.S. TIPS Index Exchange-Traded Fund (TIPZ)
  • PIMCO 1-5 Year US TIPS Index Exchange-Traded Fund (STPZ)
  • PIMCO 15 Year US TIPS Index Exchange-Traded Fund (LTPZ)
  • Schwab U.S. TIPS ETF (SCHP)
  • Vanguard Short-Term Infl-Prot Sec Idx ETF (VTIP)

I can understand the desire to go with shorter-term TIPS, because when rates begin rising the longer-term Treasurys are going to be slammed. A rise of just a half percentage point will drop the value of a 30-year TIPS by nearly 15%.

Short-term TIPS, though, lock in a return that will lag inflation by at least 1.6%. So it will take mighty high inflation to get any sort of return. On the other hand, your money market fund will lag inflation by the rate of inflation.

I don’t have a great answer for storing short-term cash. My personal preference is the Vanguard Short-Term Corporate Bond ETF (VCSH), with $5.4 billion in assets and an expense ratio of 0.12%. I can buy and sell this at Vanguard without any trading fees.

It currently yields 1.22%, versus a big question mark for a fund like Vanguard’s short-term VTIP. Vanguard, being super responsible as usual, lists VTIP’s current yield as  -2.13%, but that is before inflation, which is running about 1.7%. This means VTIP has a negative current yield. (On the other hand, VTIP’s net asset value has risen by about 1% more than VCSH’s since the launch in October, and that helps even out total return.)

This again points out the need to shop for the lowest possible expense ratios and trading fees when you invest in short-term bond ETFs.

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2 Responses to Does the world really need more TIPS mutual funds?

  1. Jay says:

    Why are you comparing VCSH’s trailing 12 month yield from Yahoo finance to VTIPs current SEC yield from the Vanguard site? That doesn’t seem fair.

    VCSH’s SEC yield is only 1.22 giving an after inflation real yield (using your quoted 1.7% inflation rate) of -0.48%, compared to VTIP’s after inflation real yield of -0.43% (-2.13 + 1.7 inflation adjustment).

  2. tipswatch says:

    Jay, good point. I couldn’t find a trailing 12-month yield for VTIP, since it hasn’t existed for 12 months. You are correct about the SEC yield being 1.22% on VCSH. I will update the blog item to match up the rates. On the second point, though, VCSH has a real yield of -0.43% and VTIP has a real yield of -2.13%. The yield is 2.13%, before inflation is figured in. Even if inflation were 10%, the real yield of VTIP would be -2.13% and the actual yield would be 7.87%.

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