TIPS Duration? Big Variance-Vanguard VIPSX vs Fidelity FSIYX

[Postmon]

I assumed the Fidelity and Vanguard TIPS funds were very similar:

Fidelity's Spartan TIPS fund FSIYX: 33 bonds, weighted average maturity of 9 years, duration of 5.48 years.
Vanguard's TIPS fund VIPSX: 32 bonds, weighted average maturity of 9.4 years, duration of 9 years.

When comparing their charts on Morningstar, both are almost identical.

I'm puzzled over the large difference in duration. Can someone explain why the Fidelity duration is significantly less than Vanguard's given everything else is similar?

[#Cruncher]

The Vanguard and Fidelity web sites report durations similar to what you do: 8.5 for Vanguard as of 12/31/2012 and 5.3 for Fidelity as of 1/31/2013. (See Vanguard Inflation-Protected Securities Fund Investor Shares (VIPSX) and Spartan® Inflation-Protected Bond Index Fund - Fidelity Advantage Class FSIYX.) The notes explaining duration say:

The duration estimates the fund's percentage change in price for a given change in the real interest rates in the TIPS market.

Duration estimates how much a bond fund's price will change with a change in comparable interest rates.

I suspect that by "comparable", Fidelity means interest rates on nominal Treasury bonds, not the real interest rates on TIPS. For example, assume that for every 1% point change in nominal rates, real interest rates change 5/8% point. Then you'd expect Vanguard's fund price to fall 8.5% X 5/8 = 5.3% for a 1% rise in nominal rates.

The problem with this is that there is no fixed relationship between nominal and real interest rates. In fact quite often they will move in the opposite direction. This makes an estimated "nominal" duration for a TIPS fund useless, in my opinion.

So I would ignore the duration reported by Fidelity. Since both funds probably have about the same holdings, I'd just use the duration reported by Vanguard for both of them. Or you could use the 8.76% I calculated (as of 2/8/2013) for the weighted average duration of all TIPS with maturities over 1 year. (See my post, Re: Consistent Yield & Duration to Help Choose TIPS Fund.)

[Postmon]

Thanks Cruncher. That clears it up. I'm surprised Fidelity doesn't use the real rates for duration. Perhaps it's an oversight as this is a relatively new fund but it is misleading.

[dphmd]

I had basically the same question and found this thread. If they are comparable, why is there such a big difference on this chart? Yes, it's a short time frame (six months -- FSIYX is very new), but there is a big split that I wouldn't expect in a treasury bond fund if there isn't some difference in the duration of the bonds.

[Postmon]

I'm guessing that big drop at the end of December was a distribution. The charts look the same from January on.

[dphmd]

Possibly, but there was a difference even before that. (The chart compares Admiral shares with Advantage shares, both 0.10% ER, so that isn't it.)