How have short-term TIPS funds performed?

A year ago, on Oct. 28, 2012, I wrote a post titled ‘Vanguard’s new short-term TIPS funds: Better than cash?‘ and asked if funds investing in short-term Treasury Inflation-Protected Securities could be an alternative to a money-market fund.

Back then, short-term bond funds were the rage, and short-term TIPS funds were even more popular (which might have ended up skewing their returns.) I noted then that these funds are conservative:

  • Since they hold only Treasurys, there is no credit risk.
  • Since they hold only short-term maturities, there is lessened interest-rate risk.
  • Their return will be bolstered if we see a period of unexpected inflation.

On the other hand, there are negatives:

  • The return is miniscule.
  • We have seen extremely low inflation.
  • Although interest-rate risk is minimized, there is still a real risk that these funds will decline in value.

As an alternative, an investor could simply buy 5-year TIPS each year at auction  and hold them to maturity, building a ladder of 1- to 5-year TIPS and eliminating all risks. But that would eliminate liquidity, and that is a key part of the appeal of short-term TIPS funds.

But can they really substitute for a cash account? Here is how the Short-Term Inflation-Protected Securities ETF (VTIP) performed against cash (0.0% return) in the year since I wrote that article:

Short Term TIPS

VTIP has lost 0.82% in value since Oct. 31, 2013, and according to Morningstar data, it has had a trailing 12-month total return (including dividends) of -0.88%. So it has not outperformed cash paying zero interest.

So, answering my question of a year ago: No, VTIP was not better than cash.

The fund showed unusual volatility in the summer of 2013 as the bond market grew worried about the potential end of Federal Reserve bond-buying. VTIP has since recovered, but you don’t expect to see this kind of volatility in a fund you are holding as a cash alternative.

Take a look at how VTIP has performed against another ETF, the Vanguard Short-Term Corporate Bond ETF (VCSH), a fund that would be considered slightly more risky than a short-term Treasury ETF:


While VTIP initially outperformed short-term corporates, the performance of the two funds ends up being nearly identical over the last year, with both losing about 0.8% of value in NAV.

However, VSCH with its better yield had a much better total return over the last 12 months: 1.44%.

This chart sums up the year for VTIP and other bond funds, adding in Vanguard Prime Money Market (VMMXX) and Vanguard Total Bond ETF (BND).

total returnIn conclusion:

  • VTIP underperformed cash as its net-asset value fell through 2013.
  • VTIP underperformed short-term corporates, because in a time over very low inflation it couldn’t match the yield of corporate bonds.
  • VTIP outperformed the total bond market, which yields more but faces higher interest-rate risk.

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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2 Responses to How have short-term TIPS funds performed?

  1. Pingback: Vanguard’s new short-term TIPS funds: Better than cash? | Treasury Inflation-Protected Securities

  2. Elliot Royce says:

    Great stuff…’re one of the only commentators who does this sort of deep dives. Keep it up!

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