By David Enna, Tipswatch.com
My article yesterday talked about the potential attraction of a “Safe Withdrawal Rate” ETF investing in Treasury Inflation-Protected Securities. Today I noticed this: a Bloomberg report on huge outflows from traditional TIPS funds and ETFs.
Here’s the headline: ‘Bad Ride’ in Inflation-Safe ETFs Fuels Record $17 Billion Exit. This is especially interesting because of comments I noted yesterday from Morningstar’s Jeffrey Ptak on investor clumsiness in investing in these funds. This is from his June 12 article:
While TIPS funds can serve a useful purpose, the data we analyzed suggests that investors have struggled to use them successfully in practice. They’ve chased returns, allocating more to TIPS funds after they’ve gained and fleeing when they falter. Thus, they have little to show for their efforts: By our estimates, the average dollar invested in TIPS funds lost 0.70% per year over the 10 years ended April 30, 2023.
In other words, investors poured money into TIPS funds from mid-2020 to 2021 after real yields plummeted, causing the fund prices to soar, and then in mid-2022 ran for the hills as real yields skyrocketed, forcing fund prices lower. Classic mistake: Buy high, sell low.
I know a lot of you probably don’t subscribe to Bloomberg (my opinion: it’s the best financial news site), so here are some highlights from today’s article:
Nearly $17 billion has exited from Treasury-inflation securities ETFs over 10 consecutive months of outflows, an unprecedented streak in data going back to 2016, Bloomberg Intelligence data show. …
That rush to the exits follows a bruising stretch of underperformance for the asset designed to protect against inflation. While TIPS weather against price erosion, real yields — which strip out the impact of inflation — have soared over the past year, shredding returns even as price pressures remain stubbornly high. That’s soured the appetite of investors who piled into TIP and similar ETFs to curb inflation.
Bloomberg’s chart shows how the investor surge into TIPS funds began in mid-March 2020, when the Federal Reserve began an aggressive program of bond-buying, while also slashing short-term interest rates. In less than one month — from March 18 to April 15, 2020, the TIP ETF soared 12.3% in value, rising from $108.75 to $122.77. And that began a 20-month string of net inflows into TIPS funds.
So new-found TIPS investors were pouring into these funds as the assets were becoming more expensive, and more risky. From March 2022 to July 2023, the TIP ETF’s net asset value fell 15.8%. (However, the fund’s total return, which includes inflation-triggered dividends, has been a bit better, somewhere around -10% over that period.)
From Bloomberg:
“You got killed and, in many cases, underperformed nominal Treasuries of similar maturities by owning TIPS,” Laird Landmann, TCW Group co-director of fixed income, said on Bloomberg Television’s Real Yield. “So it really has been a bad ride and it’s not surprising the retail side of the equation bailing out of the ETF at this point.”
The article closes with a negative viewpoint from JP Morgan Asset Management on the value of TIPS as a trading investment, based on interest-rate risk:
“TIPS do not really represent tremendous opportunity in our opinion because the duration — and they do tend to be longer-duration instruments — tend to dominate the risk there,” JPMorgan Asset Management Head of Market Strategy Oksana Aronov said on Bloomberg Television’s Real Yield.
Final thoughts
Although I don’t invest in TIPS funds other than Vanguard’s short-term fund, VTIP, I don’t think this is a particularly horrible time to be putting money into those investments. The TIP ETF is trading today at $107.67, compared to the all-time high of about $131 it hit two years ago, in July 2021.
Because real yields have increased so dramatically over the last 15 months, a lot of the “high” risk has been washed out of these funds. Of course, rates could continue climbing higher. If a recession strikes and interest rates begin falling — and especially if the Federal Reserve caves in and starts bond-buying — these TIPS funds will do very well.
But I think we can eliminate the idea of a Federal Reserve “rescue” through the rest of 2023 and probably into 2024. And if inflation slides into a range around 3%, these TIPS funds won’t deliver outstanding performance.
That doesn’t take away from the appeal of individual TIPS, with good real yields, held to maturity. That’s a winner’s bet.
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David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. I Bonds and TIPS are not “get rich” investments; they are best used for capital preservation and inflation protection. They can be purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.
Treasury Inflation-Protected Securities 
I’m ditching my TIPs ETF (Schwab) and my Vanguard bond fund (which I noticed holds a lot of treasuries). Will put the proceeds in more CDs and T-bills, as well as TIPs. For now, will hold the accrued interest in my money market account, until there is enough for additional purchases.
Good plan
I actually like Schwab’s SCHP fund as the best full-maturity TIPS fund, but I started selling out of it in late 2021 to move money to VTIP, which I considered more stable. I still have a holding in VTIP, as I have noted, which I have been selling to buy individual TIPS this year.
Hand raised here…I confess that I was one of those who rushed in and then bailed last fall. I got caught up in the brouhaha at the time of spiking inflation and the appeal of a TIPS ETF. I bought SCHP, not understanding that its return was based more on inflation expectations, rather than actual inflation, since it held many intermediate-termed TIPS. So I sold and redeployed into the beaten-down VCIT ETF (although not TIPS, but still bonds), and now I’m almost back to even, while SCHP is still lagging quite a lot. The best lesson I learned from that haste was to buy individual TIPS and hold to maturity, which I have done since. I also concur that Bloomberg is the best, and Real Yield is a wonderful program focusing on fixed income.
David – There was a bump up on the 2 year and 5 year notes June 30. Any thoughts of what this means and where the 3 year might be going this week? Thanks.
Sorry, the auction date on the three year is July 11. Thank.
The Treasury estimates the 2-year yield closed the week at 4.87%, up 50 basis points in the month of June. The 5-year closed at 4.13%, up 43 basis points. That’s a good trend for the investor. But best-in-nation CD rates remain a bit higher, about 5% for a 2 year and 4.5% for a 5-year. The 3-year is also heading up, now at 4.49%, up 51 basis points for the month.
I was considering purchasing my first TIPS.
CUSIP: 912828B25
Maturity: January 15, 2024
YTM: 3.763%
Coupon Rate: 0.625%
Market Price: $983.34
Estimated Markup: $0.00
Principal Amount: $983.34
Accrued Interest: $3.73
Estimated Total Cost: $1,281.99
Is the high total cost due to the inflation adjustment? How can the YTM be so high with a low coupon rate and a high total cost? How much will I receive on the maturity date?
This particular TIPS is interesting because of 1) its very short time to maturity and 2) its inflation index of 1.299, and 3) its below-market coupon rate of 0.625%. All of that adds up to a price of about 98.30 for $100 of value. The real yield to maturity looks crazy at 3.763%, but that is an exaggerated annualized rate. More likely for a small order you would get 3.86%, still appealing.
Let’s say you do a $1,000 investment. You are buying about $1,299 of principal at a price of about 98.30 = $1,277 rough estimate. You will be paying for the accrued interest up to this date, so basically you will be getting about 0.312% + inflation accruals until maturity. If inflation averages 3.5% annualized over the next six months, you would be getting a return of about 2.0%, at a discount, so actually about $1,325 total principal (including coupon) at maturity, but you paid only $1,277, so a gain of 3.8% in six months, but that depends on inflation holding in the 3.5% range. Not bad. It could work out fine, but it won’t make you rich.
If inflation is 3.5% the annualized nominal yield would be ~7.5%?
(1-1325/1277)*2
Could be about right, but keep in mind that you are looking at inflation for June through half of November, since the inflation adjustments are set by inflation 2 months earlier. The inflation adjustment for July will be 0.25%, based on May inflation. Non-seasonal inflation tends to run low in the last half of the year. Last year, it was only 0.27% total from July to December.
Good time to load up on TIPS? Many bonds, with 5 year or less maturities, are trading on the secondary market are yielding over 2 percent (that’s above inflation, of course). A few are over 3 percent. That’s killer yield. For a guaranteed federal security when inflation seems far from dead. If held to maturity, could be a nice return over the next few years. Worst case scenario is a good yield…and if inflation surges again…a possible big return. Again hold until Maturity! Thoughts?
It seems not many comprehend the differences between a bond fund and a bond. If you invest in a fund you are at their mercy as they dive in or jump out. Anyone who recalls the ultrashort-term bond funds (safe as a money market) of 2008 knows what can happen.
I agree…I was in that Schwab fund but luckily got out in time.
Good on you. Schwab wasn’t the only one either, just the worst of the lot.
Len,
“If you invest in a fund you are at their mercy as they dive in or jump out.”
A very real risk with an active bond fund and exactly why you should never invest in an active bond fund.
If you want to invest in bonds via a mutual fund or ETF only use indexed funds. They don’t try to time anything and won’t be, “diving in or jumping out.”
But even with an index bond fund you must understand how bonds work and properly match them to your investment goals. Way too many people don’t do either and then act surprised when they loss money. Kind of like someone who goes skydiving without understanding how a parachute works. It is going to hurt when you reach the ground!
I agree.
Disagree. The manager of a bond index fund is no less at the mercy of investors diving in and jumping out (cash flows) . He is stuck buying and selling at the current market prices unless they temporarily close the fund.
Yep, the manager of an index fund must sell to cover investors who jump out and buy to cover investors who jump in. But the investor who stays the course isn’t affected and doesn’t care.
Before 2022, if you asked the average TIPS fund/ETF investor (including most financial advisors) how these vehicles would perform if inflation jumped to 9%, most would have said they’d expect returns to be 9% or more.
ERRRR – thank you for playing. To me, this explains the inflows and outflows from these holdings.
Back in early 2022, I will admit that I didn’t think the Federal Reserve would have the courage to ramp up interest rates aggressively. That hasn’t been the Fed’s “way” for a decade. If they had caved, we still might have runaway inflation and those TIPS funds wouldn’t look so bad. But at the time, I closed out my holdings in Schwab’s SCHP and moved everything to VTIP or cash, preparing for future TIPS purchases. And nevertheless, my large holding in BND got slammed. That’s the way it goes.
David, could you give a quick explanation of why you like (or don’t dislike) VTIP? The 30-day yield is only 2.2%, the 1-year total return is -1.21%, and all the multi-year total return numbers are below 3%.
I use VTIP as a holding fund in a traditional IRA and sell shares to buy individual TIPS when I see real yields I like. Under normal circumstances it will track inflation pretty well and because of the short duration (2.5 years) it has less interest-rate risk. But … short-term real yields skyrocketed over the last 15 months, cutting into its performance. It was down 3% last year and is up 1.8% this year, so this is not a nightmare fund. I don’t need it to be volatile. Compare that to the total bond fund (BND, which I also own), down 13.1% last year and up 2.6% this year.
To hold funds, I use VMRXX, Money Market Fund which is always positive in returms, low expense ration and liquid. It has to compete with the likes of SWVXX from Schwab and FZDXX from FIrdelity. I use all of them.
I believe people poorly understand bond funds of all kind, not just tips.
Exactly.
Right on the mark!
it really speaks to how poorly people understand the particular mechanism of tips. you rarely get a clear explanation even in the popular financial press.
I am showing current losses in my recent TIPS acquisitions. So I would think this would confuse many investors.
Correct. It is hard to ignore market-value swings, but if you are holding to maturity, you should. TIPS held at TreasuryDirect show par value x inflation index, which is an accurate benchmark and most likely wouldn’t show losses. But we all want to put TIPS in tax-deferred brokerage accounts, so we’ll see market value. No way to avoid that.
You all may find this strange, but I have, sort of, trained my mind and eyes to not look at the red numbers when I open my portfolio since all my equity holdings are for long-term and individual bond holdings are to be kept to maturity. And of course no bond funds…..However, as my wife and I truely transition into some form of retirememt, I need to learn timing and sell-cost-averaging (my term)….:)
I meant sell-averaging and not sell-cost-averaging
Do you plan to hold to maturity? That is one of the key recommendations of Tipswatch, they they should be held as a lock-up. Then, you should ignore TIPS valuations along the way as they will not affect you.
I do intend to hold my TIPS investments to maturity.