Short-Term IPS Fund (VTAPX): Where's the Distribution?

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Short-Term IPS Fund (VTAPX): Where's the Distribution?

Postby Van » Mon Jul 01, 2013 11:54 am

Vanguard states that their Short-Term Inflation Protected Securities Fund will have a quarterly distribution. I've owned this fund since January of 2013, but I did not receive a distribution at the end of March or at the end of June. I don't believe I'm alone in this regard, since I don't believe Vanguard declared a distribution at the end of either quarter. Do you think anything unusual is going on here?
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Re: SHORT-TERM IPS FUND (VTAPX): WHERE'S THE DISTRIBUTION?

Postby nisiprius » Mon Jul 01, 2013 12:19 pm

I think it's reasonable to be puzzled. I'm puzzled, too. I thought it might have something to do with the fact that it has been losing money, but so has the Vanguard Short-Term Bond Index Fund, and it has been paying its (monthly) distributions. The little symbols on the Morningstar chart indicate a dividend distribution.

I see no option but to use the special Nisiprius superpower known as "calling Vanguard's 'contact us' phone number and asking."

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Re: SHORT-TERM IPS FUND (VTAPX): WHERE'S THE DISTRIBUTION?

Postby nisiprius » Mon Jul 01, 2013 12:44 pm

By the way, it does seem to me that Vanguard's a little slower answering the phone than they used to be... Anyway, the front-line rep transfers me to a "fund specialist." He looks up the fund, and has basically the same reaction Van and I had: "Hmmm, that's odd, hasn't been one since December. Maybe because the fund has been negative?" I say "Well, short-term bond index has been negative, too, but it has made distributions." He says "Well, I need to put you on hold to get a definitive answer." He comes back and my understanding, as repeated back to him and confirmed is: what is distributed is the combination of the coupon interest payments and the inflation adjustment in the principal, and if the sum of those two is negative, there is no distribution.

I vaguely remember that there is something like this in the regular TIPS fund, and it explains why the quarterly amounts fluctuate or something.

I am not going to bother to check details, maybe someone else knows them off the top of their head, it's enough for me to know that "the dividend payout rules for TIPS funds are weird because the inflation adjustment numbers factor into it in some way." That seems illogical since you have no access to the inflation adjustments until the bond matures.

I see that the Prospectus does say this (yes, I hold a very small amount of this fund, and, no, I didn't read the Prospectus when I bought it :oops: )
The Fund is subject to 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.
That doesn't really answer the question of the precise rules by which the dividend payout is calculated.
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Re: Short-Term IPS Fund (VTAPX): Where's the Distribution?

Postby House Blend » Mon Jul 01, 2013 12:55 pm

The long TIPS fund (VIPSX) has had numerous quarters without a dividend.

The data on Yahoo Finance frequently has errors in it, so take this with a grain of salt, but it appears that VIPSX paid

one quarterly dividend in 2002, a total of $0.03/share,
three quarterly dividends in 2003 and 2006,
two quarterly dividends in 2009 (one of which was $0.005/share).

This post from #Cruncher may also be enlightening:
http://www.bogleheads.org/forum/viewtopic.php?p=1736455#p1736455
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Re: SHORT-TERM IPS FUND (VTAPX): WHERE'S THE DISTRIBUTION?

Postby #Cruncher » Tue Jul 02, 2013 12:52 am

nisiprius wrote:I say "Well, short-term bond index has been negative, too, but it has made distributions."
Where do you see that this fund has been "negative", Nisi? When I go to Search for more historical price information on the Vanguard Short-Term Bond Index Fund Investor Shares (VBISX) Price & Performance tab, it shows the SEC yield has been positive throughout 2013.

nisiprius wrote:what is distributed is the combination of the coupon interest payments and the inflation adjustment in the principal
Besides the coupon, bond premium amortization needs to be considered. For example assume that on 1/2/2013 Vanguard bought $100 face value of the 1.25% April 2014 TIPS when the yield was -1.262% (see WSJ TIPS Quotes 1/2/2013). The price corresponding to this yield is 103.25%. * Vanguard's accountants will amortize this $3.25 premium over the remaining life of the bond.

For the first six months the amortization would be $1.25. As shown below, this exceeds the coupon payment, so overall the interest income in negative. This will always be the case for a bond purchased when its yield-to-maturity is negative.
Code: Select all
  103.25   Price @ -1.262 yield 1/2/2013 *
  102.00   Price @ -1.262 yield 7/1/2013 *
   (1.25)  Amortization of premium
    0.62   Coupon for 1/2 year
   ------
   (0.63)  Interest Income
* Determined using a bond calculator like FICALC.com.
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Re: SHORT-TERM IPS FUND (VTAPX): WHERE'S THE DISTRIBUTION?

Postby dbr » Tue Jul 02, 2013 9:58 am

nisiprius wrote:
I am not going to bother to check details, maybe someone else knows them off the top of their head, it's enough for me to know that "the dividend payout rules for TIPS funds are weird because the inflation adjustment numbers factor into it in some way." That seems illogical since you have no access to the inflation adjustments until the bond matures.


TIPS funds do pay out the inflation increment each quarter while TIPS bonds held individually do not. People forget two things about that:

1. The increment could be negative and destroy the dividend payout.

2. When it is paid out the investor needs to reinvest the payout or the inflation protection of the investment will not accumulate as intended.

All of this is part of a general lesson that one should not be investing in anything for the payout but rather for the total return, otherwise misunderstandings arise because payout is only one piece of a total mathematical picture.
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