Vanguard TIPS Fund Maturity Graph

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Vanguard TIPS Fund Maturity Graph

Post by #Cruncher »

Image
I've seen several posts discussing the duration of the VG TIPS fund so I thought it would be interesting to show the fund's holdings graphically. I copied them from Vanguard's web site (as of 9/30/2010) and used Excel to group them by maturity year and produce a bar graph of the result.

The fund holds all 30 extant TIPS except for the ones maturing in 2011. 2014 is the maturity year with the largest $ holding (in market value): $4.3 billion = $1.9b of the Jan 15 + $1.1b of the Apr 15 + $1.3b of the Jul 15. 2032 is the smallest with only $70 million of the Apr 15, the only TIPS maturing that year.

I hadn't realized how big this fund is in relation to the TIPS market. For example it owns about 7% of the Jan 15, 2014 10-year notes that were auctioned by the Treasury ($1.5b face value / $21b).

Edit 07/04/12: Fixed URL for graph to point to new eyebonds.info domain
Last edited by #Cruncher on Wed Jul 04, 2012 2:27 pm, edited 1 time in total.
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Re: Vanguard TIPS Fund Maturity Graph

Post by Doc »

#Cruncher wrote:
I hadn't realized how big this fund is in relation to the TIPS market. For example it owns about 7% of the Jan 15, 2014 10-year notes that were auctioned by the Treasury ($1.5b face value / $21b).
Makes you wonder about just how efficient the TIPS market must be if one player which doesn't trade much owns 7% of the total. :(
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Post by RobG »

Interestingly enough I just did the same thing. You might consider putting zero in for the years without holdings to show the gaps.

I wonder if there is a reason why some years are overweighted...

I also wonder how much of the total TIPS issued are owned by this fund.
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Re: Vanguard TIPS Fund Maturity Graph

Post by grayfox »

#Cruncher wrote:Image
Nice chart.

According to the WSJ, all the TIPS 2011, 2012, 2013, 2014, 2015 have negative YTM.

2025 and longer they are all above 1% YTM.

Why not sell all the 2011 thru 2015 and put the money into 2925 thru 2040 ?

http://online.wsj.com/mdc/public/page/2 ... nav_2_3020
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Post by nisiprius »

That's very interesting, thanks for posting. Oddly enough I had just made a similar chart for my own TIPS holdings, which are an undisciplined mess. (Purchased over the years largely in response to "windfalls." Whenever I wasn't quite sure what to do with money, I'd say, "Oh well, how about a few more TIPS.") But, by comparison with VIPSX, not as ludicrously bad as I thought.
grayfox wrote:Why not sell all the 2011 thru 2015 and put the money into 2925 thru 2040
Presumably their choices have something to do with the benchmark index for the fund, and presumably other such funds, such as the iShares TIP ETF, Fidelity FINPX, etc. would have similar holdings... perhaps I'll look those up when a get a Round Tuit.

Because there are currently no 2030, 2031, 2033, 2034, 2035, 2036, 2037, 2038, or 2039 TIPS could also play a role.
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Post by #Cruncher »

RobG wrote:I wonder if there is a reason why some years are overweighted...I also wonder how much of the total TIPS issued are owned by this fund.
Here's a bar chart I just prepared of the total amount of TIPS that the Treasury has auctioned grouped by maturity year. It's like the Vanguard chart except it also shows the individual TIPS maturing each year. The total of all the TIPS ever auctioned is $661 billion of which $557 are still outstanding. With about $26b (face value), Vanguard owns 4.7% of this total. And it looks like Vanguard roughly mirrors the maturity distribution.
Image
Edit 07/04/12: Fixed URL for graph to point to new eyebonds.info domain
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Post by AzRunner »

grayfox wrote:
Why not sell all the 2011 thru 2015 and put the money into 2925 thru 2040 ?
Because there is greater risk in having real interest rates going higher with the longer maturity TIPS than with the shorter maturity.

Yes, you can sell the shorter maturity TIPS and take your profit, giving up the inflation protection, but then you have to place the money someplace else.

Cash isn't as good since it is not indexed to inflation. Nominal bonds have inflation risk.

Of course, if you knew that real interest rates were going to rise, you could sell your short-term TIPS, put the money in a money market account and then buy the long term TIPS once the real interest rate risk took place. But that takes a really good crystal ball.

For many, given that there aren't many good alternative options, they just let their existing short term TIPS sit there, figuring that at least they protect against a sudden inflation spike.

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Post by tetractys »

Is it conceivable that enough TIPs being issued could have a regulating or limiting effect on inflation?

Just wondering. -- Tet
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Post by fredflinstone »

tetractys wrote:Is it conceivable that enough TIPs being issued could have a regulating or limiting effect on inflation?

Just wondering. -- Tet
Yes.
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Post by nisiprius »

Here's the chart for the iShares TIP ETF. The Y axis is what the last semiannual report lists for "value."

I dunno what to say except that it raises the question of how the Barclay TIPS Index is constructed... and, OK, I guess it puts into sharp relief Larry Swedroe's comment that cap-weighting in bonds doesn't make sense. Why on earth would I want such a difference in weight between 2032 and 2040?

Maybe, after all, it really does make more sense to buy individual TIPS than a TIPS fund. I guess the average duration and maturity are what they are, but I'm grateful to # Cruncher for posting because I'd never even thought to look and I have to say it sure isn't what I expected.

Image
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Post by Doc »

nisiprius wrote:I dunno what to say except that it raises the question of how the Barclay TIPS Index is constructed...
Criteria for inclusion in the index
Issuer type Only government domestic debt, i.e. debt issued by government in US dollars
Bond type
Bonds must be capital-indexed and linked to an eligible inflation index. They should be denominated in US dollars and pay
coupon and principal in US dollars.
Coupon type The notional coupon of a bond must be fixed or zero.
Maturity Bonds must have a minimum remaining life of greater than one year on the rebalancing date.
Issue date Bonds must settle on or before the rebalancing date to be eligible for the index.
Min issue size The issue size must be equal to or in excess of $500mn.
https://ecommerce.barcap.com/indices/index.dxml

So, now that we know how the index is constucted, ah ha ???? :lol:
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Post by nisiprius »

Doc wrote:
nisiprius wrote:I dunno what to say except that it raises the question of how the Barclay TIPS Index is constructed...
So, now that we know how the index is constucted, ah ha ???? :lol:
:oops: Doh. I yam dumm. U R rite. I yam none the yyser.

Meanwhile: here's a comparison of Fidelity's TIPS fund, FINPX with iShares TIP:

Image

Pretty similar.

What, you say, did Fidelity leave out 2032 completely? No, it didn't. According to the October 31, 2010 report it It had $1,732 worth.

No, that is not thousands. That is dollars. From the table in the semiannual report:

3.375% 4/15/32 1,732
2.125% 2/15/40 97,075,803

The $2.8 billion Fidelity Inflation-Protected Bond Fund holds one thousand, seven hundred and thirty-two dollars worth of the 4/15/2032 TIPS. Which is to say... one of them!

Wouldn't you like to know the story behind that?

Added: OK, I sent a query to Fidelity customer service:
According to the October 31, 2010 semiannual report, at that time Fidelity Inflation-protected Bond Fund, FINPX, held $2.8 billion total assets. That report's list of investments shows:

3.375% 4/15/32 Principal 1,230 Value 1,732

These values are NOT thousands of dollars. They are just dollars. Every other value in that column has values with six or seven figures, and the column total is given as "2,806,257,863."

The stated values for principal and value indicate that at that time, the fund was holding precisely ONE 2032 TIPS bond.

Can you confirm that I'm reading the report right and that the fund literally holds exactly one bond with 2032 maturity? And, please, can anyone hint at what might be the interesting story of why a $2 billion fund would do that?
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Post by detifoss »

great thread

thanks for starting it OP and thanks for doing the legwork/graphing

I switched to individual TIPS once my portfolio become big enough to justify it

this data, though, doesn't make me feel any worse or better about my decision

I am surprised that nearly 5% of TIPS are held by Vanguard!

I wonder what % of the total outstadning market cap of the S7P 500 Vanguard holds through all of its index funds (not its actively managed funds).

Just curious for comparison's sake.

Also curious if any individual fund company owns 5% of all outstanding nominal USTs (not incl T-blls). I highly doubt it (?PIMCO) and this would of course go back to liquidity concerns in TIPS manifesting themselves in liquidity panics like 2008...

Just something to keep firmly in mind for all of us who hold TIPS - they have both real interest rate risk and liquidity risk...
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Post by nisiprius »

And here are iShares TIP, which claims to track the Barclay's TIP index, together with Fidelity FINPX and Vanguard VIPSX, which do not claim to be index funds, but which specify Barclays Capital U.S. Treasury Inflation Protected Securities Index as their benchmark.

Image

Now, in another thread,
Alec wrote:Go look at Pimco's Real Income 2029 for an example of a fund that has a specific goal.
so I did, and this what it looks like:

Image

That, however, is a perplexing fund in its own right and I believe I'll start another thread on it.
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Post by #Cruncher »

tetractys wrote:Is it conceivable that enough TIPs being issued could have a regulating or limiting effect on inflation?
This got me wondering how many TIPS have been issued over time. I was expecting a continuous expansion of the program. But this isn't the case.
The following shows the net face value issued each calendar year since the program began in 1997.
Image
  • Net volume of issuance stayed about $30b-$35b each of the first 3 years and then declined to a low of $6b in 2002 when the first 5-years matured but were not replaced. It then rose to a peak of $77b in 2006, before falling to $43b in 2009, and rising slightly in 2010 to $48b.
  • This all adds up to $557 billion face value outstanding at the end of 2010.
  • 5-year notes were issued the first year, but not again until 2004.
  • 10-year notes have been issued every year.
  • 20-year bonds were first issued in 2004, but discontinued in 2010.
  • 30-year bonds were issued 1998-2001, but then discontinued until 2010.
Edit 07/04/12: Fixed URLs to point to new eyebonds.info domain
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Post by nisiprius »

Cool, thanks for digging that out.

No, there hasn't been any continuous expansion. The Treasury does not issue bonds to serve the needs of investors, it issues them to serve the government's need to borrow money, and during the years of the surplus the government did not need to borrow and issued few bonds of any kind.

As an early adopter of TIPS I remember being inconvenienced by this. I don't remember if I was looking for 5-year or 10-year--I've mostly bought 10-year. You say they were issued every year, but I'm wondering if there was a year when there was only one auction and I missed it.
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Post by Valuethinker »

nisiprius wrote:Cool, thanks for digging that out.

No, there hasn't been any continuous expansion. The Treasury does not issue bonds to serve the needs of investors, it issues them to serve the government's need to borrow money, and during the years of the surplus the government did not need to borrow and issued few bonds of any kind.

As an early adopter of TIPS I remember being inconvenienced by this. I don't remember if I was looking for 5-year or 10-year--I've mostly bought 10-year. You say they were issued every year, but I'm wondering if there was a year when there was only one auction and I missed it.
UK Treasury was pressed to issue 50 year Indexed Linked bonds, so it did.

Real yields are so low right now (sub 1.5%) that it would pay the UK government to fully fund using Indexed linked gilts of very long maturity.

The job of the Debt Management Office dmo.gov.uk is to fund the UK government's Public Sector Net Cash Requirement at the lowest possible cost.

Presumably US Treasury is similar. However TIPS are broadly disliked-- although it was a US Treasury Secretary (Rubin) who ordered their creation (against widespread opposition). The US taxpayer got a very 'bad deal' when they were issued at 3.5%+ real yields.

Now however, the opposition to issuing TIPS would centre around the idea that it admits defeat vis a vis inflation (that was the original argument against).

So the US has only 10% govt debt outstanding as TIPS. UK government has 25%.

A government which thought 'in the round' and took a systemic view would recognise that government is one of the best ways to hedge against risk in retirement (you want no credit risk, and protection against inflation: government has to plan to honour its debts, and its revenues are inflation linked-- so you have a natural buyer of that protection (retirees and pension plans) and a natural seller) and therefore issue lots and lots of inflation linked debt. Thus creating welfare (in the economic sense) by filling a market hole that otherwise cannot be filled.

Zvi Bodie admitted in an email to William Bernstein that in the first edition of his book, he did not say enough about the general equilibrium implications: ie if we all try to be 90% TIPS in our retirement accounts, as Bodie recommends.

It's a harder question whether government should go the next step and issue longevity bonds. I tend to think yes, because no one else can do it. The head of the DMO thinks no, because it would be an illiquid market with high costs (to the borrower).

So it's me vs. the head of the DMO. You choose ;-).
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Post by #Cruncher »

nisiprius wrote:The Treasury does not issue bonds to serve the needs of investors, it issues them to serve the government's need to borrow money, and during the years of the surplus the government did not need to borrow and issued few bonds of any kind.
Naturally, and that's the way it should be. I'd be interested though, to see TIPS issuance over time as a percentage of total Treasury offerings.
nisiprius wrote:As an early adopter of TIPS I remember being inconvenienced by this. I don't remember if I was looking for 5-year or 10-year--I've mostly bought 10-year. You say they were issued every year, but I'm wondering if there was a year when there was only one auction and I missed it.
There were several years when only one new 10-year was issued (1997-2001 & 2003). But in each of these years there were at least two auctions due to re-issuance. Source: US TREASURY TIPS - IN ORDER OF ISSUANCE

Edit 07/04/12: Fixed URL to point to new eyebonds.info domain
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Post by Valuethinker »

nisiprius wrote:Cool, thanks for digging that out.

No, there hasn't been any continuous expansion. The Treasury does not issue bonds to serve the needs of investors, it issues them to serve the government's need to borrow money, and during the years of the surplus the government did not need to borrow and issued few bonds of any kind.

As an early adopter of TIPS I remember being inconvenienced by this. I don't remember if I was looking for 5-year or 10-year--I've mostly bought 10-year. You say they were issued every year, but I'm wondering if there was a year when there was only one auction and I missed it.
I forgot. There was also a US Treasury Secretary (under Bush II?) who thought the US should not issue 30 year T Bonds. So they stopped so doing. I think the argument was the US taxpayer should not pay the premium of such long term debt.

This created an artificial scarcity.

With the size of the funding requirement, that has been rescinded.

But it would have been better for markets if the US Treasury recognized its essential role in issuing instruments which offer risk free hedges, and had just stuck to offering 30 year bonds (as a proportion of total funding needs).

Note US was paying off Treasury debt in 2000: I don't know if they also issued, but net they retired debt.
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Post by grayfox »

Great charts!

So could you say that investors are better off when the U.S. government runs bigger deficits and has to issue a lot of new debt?
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Post by nisiprius »

nisiprius wrote:What, you say, did Fidelity leave out 2032 completely? No, it didn't. According to the October 31, 2010 report it It had $1,732 worth.

No, that is not thousands. That is dollars. From the table in the semiannual report:

3.375% 4/15/32 1,732
2.125% 2/15/40 97,075,803

The $2.8 billion Fidelity Inflation-Protected Bond Fund holds one thousand, seven hundred and thirty-two dollars worth of the 4/15/2032 TIPS. Which is to say... one of them!

Wouldn't you like to know the story behind that?

Added: OK, I sent a query to Fidelity customer service...
And I now have their reply, which is pretty much what I expected:
A Fidelity rep wrote: Dear Mr. ----------

It is great to see your interest in this semi-annual report, and I do apologize for the delay in responding to your message.

In reviewing the October 31, 2010 semi-annual report, I do see the security that you are referring to for FINPX, within the listing of the U.S. Treasury Inflation-Indexed Bonds. While it is an interesting listing, being so small compared to the rest of the portfolio, there is no way to identify why it was purchased, or even if it is still held in the portfolio. We are not privy to the rationale behind the manager's individual portfolio selections, but again, this is an interesting choice among the entire portfolio.

If you go to the same page where you viewed the semi-annual report, you may also want to view the Shareholder Update tab. The "Fund Talk" section of that gives a recent interview with the fund manager, William Irving, so that you can gain a little insight into his strategy and outlook for the fund.

Have a wonderful rest of your week, Mr. ----------, and thank you for choosing Fidelity for your investments.
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Post by nisiprius »

And, following up on the mystery of the solitary single 2032 bond in FINPX, representing one millionth of the fund's total holdings, I emailed the fund manager, who replied cordially but said he was not at liberty to respond directly.

Never mind, I am poised and ready for Fidelity to sell that bond, and when I see that the value of the 2032 TIPS has plummeted as a result, I shall place my order for one bond and pounce!
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Post by #Cruncher »

Vanguard has recently updated its TIPS fund holdings as of 3/31/2011 so I thought I'd update the 9/30/2010 chart from the original post. For comparison I'm including the holdings at 12/31/2010. Also for comparison I'm including a line representing the % distribution of all TIPS issued by the Treasury (market value as of 3/31/2011). This line represents the maturity distribution that a TIPS index fund or ETF would try to match. While Vanguard's isn't an index fund, I thought it would be interesting to see how it compares to one.
Image
Changes from December 31 to March 31:
  • Large purchase of the Jan 2021 which was first auctioned this year. Vanguard holds $1.655b face value or 6.7% of the total $24.75b auctioned January 20 and March 24. It would be interesting to know how it accumulated such a large postition -- at auction or in the after market; and how much it paid compared to the non-competitive price us little guys paid who bought at one of the auctions. (See the 3rd and 4th lines from the bottom of this list of TIPS auctions.)
  • Smaller purchase of the Feb 2041 which was also first auctioned this year along with a reduction in the Feb 2040.
  • Slight increase in maturities for 2018.
  • Every other maturity year has a small or moderate decrease.
Overall Vanguard seems to hold maturities roughly in proportion to the amounts which have been issued by the Treasury and which an index fund would try to match. But there are some differences:
  • It holds a much higher proportion of the recently issued Jan 2021.
  • It continues to hold a lower proportion of the April 2032.
Edit 07/04/12: Fixed 2 URLs to point to new eyebonds.info domain
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Post by Bongleur »

Maybe Vanguard is taking into account the needs of its Target Date funds that hold the TIPS fund?
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Re: Vanguard TIPS Fund Maturity Graph

Post by #Cruncher »

I've updated my graph to show TIPS maturities as of 9/30/2013. Vanguard is represented by the red bars. The blue bars represent the allocation of all TIPS maturing in 1 year or more (the 1+ index). *
Image
Vanguard is still fairly close to the index allocation, but not as close as it used to be. As of 9/30/13 it is overweighting the maturities up through 2023 and underweighting the ones after that. Maturities 2025 and later constitute 31% of the index, but only 26% of Vanguard's holdings. This is most noticeable for the TIPS maturing in 2040 and 2041 where Vanguard has only about 1/2 the index allocation.

This different weighting causes the Vanguard fund to have a lower duration than the index. For example, for the 1+ index allocation I calculate an average modified duration of 8.3 as of 9/20/2013. But with the Vanguard allocation it is only 7.8. Therefore, the Vanguard fund has a little less interest rate risk than broad TIPS funds that closely follow the index. On the flip side, its yield is about 0.1% point less because it holds a smaller percentage of the higher yielding long maturities.

Another new thing I noticed is that Vanguard is holding some nominal Treasuries. Of a total market value of $29,302 million as of 9/30/2013, $712 million, or 2.4%, is invested in 7 nominal Treasury bonds maturing from 2018 to 2023. This isn't much; but it's the first time I've seen nominal bonds in the fund's holdings. I have no idea why the fund is doing this. (I'm ignoring these nominal Treasuries in the graph and in the calculation of duration.)

* Vanguard data comes from clicking Portfolio holdings on the Vanguard Inflation-Protected Securities Fund (VIPSX) Portfolio tab. The 1+ index data comes from a spreadsheet I prepared as of 9/20/2013. (See my post, Re: Consistent Yield & Duration to Help Choose TIPS Fund.)

Edit 11/8/13: I was lazy in using an existing weighting from 9/20/2103 for the 1+ index. (I thought what difference could 10 days make?) But yesterday I decided that to be comparable to the Vanguard holdings, which are as of 9/30/3013, I should recompute the index using my Yield to Maturity and Duration Calculator with prices pasted from WSJ TIPS 9/30/2013.

Although the weighting shifted slightly toward the long end, it wasn't enough to change any of the figures I mention above, except that the average modified duration of the 1+ index increased from 8.3 to 8.4. And the single largest change in yearly allocation was from 9.43% to 9.37% for 2016, not enough to be noticeable in the graph; which, therefore, I've left unchanged.
Last edited by #Cruncher on Fri Nov 08, 2013 8:50 am, edited 1 time in total.
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Re: Vanguard TIPS Fund Maturity Graph

Post by taegirain3 »

The VIPSX TIPS fund also has a fair amount of 'Vanguard Market Liquidity Fund', whatever that is. (That fund has short duration holdings from the American Honda Finance Corporation...?). Anyone have any idea why?
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Re: Vanguard TIPS Fund Maturity Graph

Post by #Cruncher »

taegirain3 wrote:The VIPSX TIPS fund also has a fair amount of 'Vanguard Market Liquidity Fund', whatever that is. … Anyone have any idea why?
According to footnote 2 on page 13 of the Vanguard Inflation-Protected Securities Fund 6/30/2013 Semiannual Report PDF file the Vanguard Market Liquidity Fund is an
Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard.
Above on page 13, under the heading "Temporary Cash Investments" it shows that 0.4% of the fund's assets are invested there. I assume Vanguard does this so that it will have a ready source of cash for possible near term purchases, dividends, or redemptions.

By the way, the 6/30/2013 semi-annual report shows $795 million or 2.5% of assets invested in nominal Treasury bonds. This is about the same % as on 9/30/2013 as mentioned in my post above. However, page 14 of the 12/31/2012 Annual Report PDF file shows no such holdings. So apparently, Vanguard decided during the first half of this year, not to have 100% of its government bonds be inflation-protected.
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Re: Vanguard TIPS Fund Maturity Graph

Post by #Cruncher »

I've updated my graph to show TIPS maturities as of 9/30/2014. The distribution of the market value of the Vanguard Inflation-Protected Securities Fund's holdings is represented by the red bars. The blue bars represent the distribution of the market value of all outstanding TIPS maturing in 1 year or more (the 1+ index). *
Image
Not much has changed since a year ago. Vanguard's holdings are still fairly close to the 1+ index; but it does overweight some medium maturities (2022, 2023, & 2024) and underweights some long ones (2028, 2029, 2040, 2041, & 2043). This different weighting causes the Vanguard fund to have a slightly lower average maturity and duration than the index, which means it has less interest rate risk. The "price" Vanguard pays for this reduced risk is a slightly lower yield to maturity (YTM) than the index (0.26% vs 0.29%). This is shown in the table below:

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                          1+ Index     Vanguard
                          ---------    ---------
Avg Maturity              9.4 years    8.6 years
Avg Modified Duration     8.4%         7.9%
Avg Yield to Maturity     0.29%        0.26%
My calculated averages for the fund's maturity and duration agree with those on the portfolio tab web page. But from that page you'd never know that they are less than the index. Vanguard reports the index's average maturity as 8.4 years and its average duration as 7.9% -- lower than they actually are. (Note: the 2.3% YTM Vanguard reports on that page should be ignored since it includes an estimate of the CPI based inflation adjustment to principal.)

The Vanguard fund is still holding some nominal Treasuries as it did a year ago. Of a total market value of $25,482 million as of 9/30/2014, $605 million, or 2.4%, is invested in 4 nominal Treasury bonds maturing from 2016 to 2021. (The graph and the calculated average maturity, duration, and YTM ignore these nominal Treasuries -- and $130 million of cash.)

* Vanguard data comes from clicking Portfolio holdings on the Vanguard Inflation-Protected Securities Fund Portfolio tab. The 1+ index data comes from my Yield to Maturity and Duration Calculator with WSJ TIPS Prices 9/30/2014
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Re: Vanguard TIPS Fund Maturity Graph

Post by nisiprius »

I wonder why it isn't an index fund... I wonder whether there are any regulatory or other barriers to doing that?

And maybe I need to update my "report" on Fidelity's FINPX... yup... as of March 31, 2014, among its $2,057,081,989 worth of bonds, Fidelity was still stalwartly hanging on to one, single, solitary bond maturing 4/15/2032 with a market value of $1,823. (And no, that is not millions or thousands, that is dollars). Poor lonely thing.

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Re: Vanguard TIPS Fund Maturity Graph

Post by #Cruncher »

nisiprius wrote:And maybe I need to update my "report" on Fidelity's FINPX... yup... as of March 31, 2014, ... Fidelity was still stalwartly hanging on to one, single, solitary bond maturing 4/15/2032
The fund is still holding just one of these bonds as of 9/30/2014. [ 1 ] Below is a table comparing FINPX's holdings (in green) against the 1+ Index (in blue) as of 9/30/2014. Naturally nothing shows up for 2032. I'm also showing the holdings for Fidelity's Spartan® Inflation-Protected Bond Index Fund - FSIYX (in red). In my opinion this fund is a better choice than FINPX because of a lower expense ratio (0.20% for the Investor class and 0.10% for the Advantage class compared to 0.45% for FINPX).
Image
Both Fidelity funds give more than the index weight to shorter maturities causing them to have smaller durations. Ironically the managed fund (FINPX) has an average duration and yield closer to the 1+ index than does the index fund (FSIYX).

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                          1+ Index       FSIYX        FINPX
                          ---------    ---------    ---------
Avg Maturity              9.4 years    8.4 years    8.9 years
Avg Modified Duration     8.4%         7.7%         8.1%
Avg Yield to Maturity     0.29%        0.24%        0.28%
Lest someone think that my 1+ Index is calculated incorrectly, the chart below compares it (in blue) and the SPDR IPE ETF (in red) as of 10/30/2014. They match up exactly for all maturity years. However, this can't be said for the iShares TIP ETF (in green). Even though it is supposed to be an index fund, TIP differs markedly in some of its holdings compared to the index. For example, it holds much more 2023 maturities and hardly any maturities in 2025, 2026, and 2043. It even holds some of the 4/15/2015 and 7/15/2015 maturities even though they aren't included in the index because they mature in less than one year.
Image
As expected IPE's duration and yield match the index. TIP on the other hand has a noticeably shorter duration and somewhat lower yield.

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                          1+ Index     SPDR IPE     iShares TIP
                          ---------    ---------    -----------
Avg Maturity              9.3 years    9.3 years    8.3 years
Avg Modified Duration     8.4%         8.4%         7.7%
Avg Yield to Maturity     0.17%        0.17%        0.13%
  1. Click Prospectus and Reports at the bottom of the FINPX Composition tab, and then click [Monthly Holdings Report] at the top of the new page.
Fidelity® Inflation-Protected Bond Fund - FINPX
Spartan® Inflation-Protected Bond Index Fund Investor Class - FSIQX
Spartan® Inflation-Protected Bond Index Fund Advantage Class - FSIYX
SPDR® Barclays TIPS ETF - IPE
iShares TIPS Bond ETF - TIP
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Re: Vanguard TIPS Fund Maturity Graph

Post by Angst »

#Cruncher wrote:Lest someone think that my 1+ Index is calculated incorrectly, the chart below compares it (in blue) and the SPDR IPE ETF (in red) as of 10/30/2014. They match up exactly for all maturity years. However, this can't be said for the iShares TIP ETF (in green). Even though it is supposed to be an index fund, TIP differs markedly in some of its holdings compared to the index. For example, it holds much more 2023 maturities and hardly any maturities in 2025, 2026, and 2043. It even holds some of the 4/15/2015 and 7/15/2015 maturities even though they aren't included in the index because they mature in less than one year.
Image
As expected IPE's duration and yield match the index. TIP on the other hand has a noticeably shorter duration and somewhat lower yield.

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                          1+ Index     SPDR IPE     iShares TIP
                          ---------    ---------    -----------
Avg Maturity              9.3 years    9.3 years    8.3 years
Avg Modified Duration     8.4%         8.4%         7.7%
Avg Yield to Maturity     0.17%        0.17%        0.13%
I was surprised to see your observations (above) about the discrepancies btw the index and iShare's TIP ETF. It all seems to add up to a fairly blatant and material departure from tracking the index - does anyone know if this is common amongst bond ETFs? I always thought that the SEC generally frowned upon the idea of actively managed ETFs.
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Re: Vanguard TIPS Fund Maturity Graph

Post by abuss368 »

Thanks for the TIPS graph. I would expect Vanguard, based on the two TIPS funds size, would impact the TIPS market when making trades for shareholders.
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Re: Vanguard TIPS Fund Maturity Graph

Post by #Cruncher »

Angst wrote:I was surprised to see your observations (above) about the discrepancies btw the index and iShare's TIP ETF. ... does anyone know if this is common amongst bond ETFs? I always thought that the SEC generally frowned upon the idea of actively managed ETFs.
I don't know if it's common. But I have also noticed it with the PIMCO TIPZ ETF. Here is its yearly maturity distribution as of 10/31/2014 (in green) compared against the 1+ Index (in blue) and the Schwab SCHP ETF (in red) both as of 10/30/2014.
Image
SCHP has a consistent slight overweighting of shorter maturities and compensating underweighting of longer maturities. But TIPZ is more erratic. For example it has much more maturing in 2025 & 2042 than the index, and to compensate none at all maturing in 2027 or 2041. TIPZ also differs from the index in holding only 22 bonds while most other broad TIPS funds hold all 35 bonds maturing in 1 year or more. For example, three TIPS mature each year in 2018 and 2019; but TIPZ holds only one in each year.

Here is how the holdings affect the average maturity, duration, and yield:

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                          1+ Index     Schwab SCHP    PIMCO TIPZ
                          ---------    -----------    ----------
Avg Maturity              9.3 years    8.4 years      9.5 years
Avg Modified Duration     8.4%         7.7%           8.6%
Avg Yield to Maturity     0.17%        0.12%          0.16%
Even though its holdings differ more abruptly versus the 1+ index, TIPZ comes closer to the index on average than does SCHP. While it's odd, I don't think the SEC would necessarily object with the approach taken by TIPZ to hold only some of the outstanding TIPS. It's common practice among some index funds to hold only a sample of the securities in the index. But usually this is done when the number of securities is large as in a total stock market index fund. It can't be difficult to own all 35 outstanding TIPS, so I don't know why the TIPZ manager chooses to hold only a sample.

I'm more concerned about index funds like FSIYX, TIP, and SCHP that hold all the outstanding TIPS in the index, but weight them slightly differently. I'm not saying there's anything special about market weighting. Indeed it looks rather weird. But however arbitrary it is, it is a fixed standard. I don't want fund managers playing around with a different weighting in an attempt to do better than their competitors.

Sources:
abuss368 wrote:I would expect Vanguard, based on the two TIPS funds size, would impact the TIPS market when making trades for shareholders.
The Vanguard broad and short term TIPS funds have a market value of about $25b and $10b respectively. This is about 3% of the $1,100b market value (as of 10/30/2014) of the 38 TIPS outstanding. But I imagine most TIPS are "locked up" by government and institutional holders; so that the Vanguard funds account for a much larger portion of the TIPS available for trade.
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Re: Vanguard TIPS Fund Maturity Graph

Post by Angst »

#Cruncher wrote:Even though its holdings differ more abruptly versus the 1+ index, TIPZ comes closer to the index on average than does SCHP. While it's odd, I don't think the SEC would necessarily object with the approach taken by TIPZ to hold only some of the outstanding TIPS. It's common practice among some index funds to hold only a sample of the securities in the index. But usually this is done when the number of securities is large as in a total stock market index fund. It can't be difficult to own all 35 outstanding TIPS, so I don't know why the TIPZ manager chooses to hold only a sample.

I'm more concerned about index funds like FSIYX, TIP, and SCHP that hold all the outstanding TIPS in the index, but weight them slightly differently. I'm not saying there's anything special about market weighting. Indeed it looks rather weird. But however arbitrary it is, it is a fixed standard. I don't want fund managers playing around with a different weighting in an attempt to do better than their competitors.
I think I've been lulled into thinking everyone is somewhat faithfully trying to follow their indexes, but this is nothing of the sort. And I agree, we're not talking sampling the Wilshire 5000 here! It doesn't surprise me that Pimco can pick a different assortment of issues and still find a way to make the gross statistics add up close to the index. Nonetheless... I appreciate your highlighting the facts. I, for one, was in the dark about this, but I doubt I'm alone. Due diligence, caveat emptor...
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Re: Vanguard TIPS Fund Maturity Graph

Post by abuss368 »

#Cruncher wrote:
abuss368 wrote:I would expect Vanguard, based on the two TIPS funds size, would impact the TIPS market when making trades for shareholders.
The Vanguard broad and short term TIPS funds have a market value of about $25b and $10b respectively. This is about 3% of the $1,100b market value (as of 10/30/2014) of the 38 TIPS outstanding. But I imagine most TIPS are "locked up" by government and institutional holders; so that the Vanguard funds account for a much larger portion of the TIPS available for trade.
Hi #Cruncher,

Thank you for that information. I would like to see Vanguard make the Intermediate Term TIPS fund a true index fund (like it's short term cousin) in the future. Would that be possible as the TIPS market grows and expands?

Best.
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Re: Vanguard TIPS Fund Maturity Graph

Post by #Cruncher »

abuss368 wrote:I would like to see Vanguard make the Intermediate Term TIPS fund a true index fund (like it's short term cousin) in the future. Would that be possible as the TIPS market grows and expands?
I don't see how size could have anything to do with it. 1) There are already several TIPS index funds based on the 1+ index, some beginning years ago when the TIPS market was much smaller. 2) The 0-5 year short term index (15 bonds) is obviously smaller than the 1+ year broad index (35 bonds). If Vanguard considers the former large enough to support an index fund, then it must also consider the latter to be large enough. I assume Vanguard has other reasons besides size for continuing to actively manage its broad TIPS fund.

This got me wondering how closely the Vanguard Short-Term Inflation-Protected Securities Index Fund follows its index of all TIPS maturing within the next 5 years (the 0-5 index). Here is a comparison as of 9/30/2014, the last date Vanguard reports its portfolio. The index is in blue and the Vanguard fund is in red.
Image
Vanguard follows the 0-5 index pretty closely. This is reflected in how nearly its average maturity, duration, and yield match the index.

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                           0-5 Index      Vanguard
                          -----------    -----------
Avg Maturity               2.55 years     2.55 years
Avg Modified Duration      2.52%          2.51%
Avg Yield to Maturity     -0.30%         -0.29%
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Re: Vanguard TIPS Fund Maturity Graph

Post by abuss368 »

#Cruncher wrote:
abuss368 wrote:I would like to see Vanguard make the Intermediate Term TIPS fund a true index fund (like it's short term cousin) in the future. Would that be possible as the TIPS market grows and expands?
I don't see how size could have anything to do with it. 1) There are already several TIPS index funds based on the 1+ index, some beginning years ago when the TIPS market was much smaller. 2) The 0-5 year short term index (15 bonds) is obviously smaller than the 1+ year broad index (35 bonds). If Vanguard considers the former large enough to support an index fund, then it must also consider the latter to be large enough. I assume Vanguard has other reasons besides size for continuing to actively manage its broad TIPS fund.

This got me wondering how closely the Vanguard Short-Term Inflation-Protected Securities Index Fund follows its index of all TIPS maturing within the next 5 years (the 0-5 index). Here is a comparison as of 9/30/2014, the last date Vanguard reports its portfolio. The index is in blue and the Vanguard fund is in red.
Image
Vanguard follows the 0-5 index pretty closely. This is reflected in how nearly its average maturity, duration, and yield match the index.

Code: Select all

                           0-5 Index      Vanguard
                          -----------    -----------
Avg Maturity               2.55 years     2.55 years
Avg Modified Duration      2.52%          2.51%
Avg Yield to Maturity     -0.30%         -0.29%
Hi #Cruncher,

Thanks for the perspective. I have always found your threads on TIPS informative and educational.

Best.
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Re: Vanguard TIPS Fund Maturity Graph

Post by #Cruncher »

I've updated my graph to show TIPS maturities as of 9/30/2016. The distribution of the market value of the Vanguard Inflation-Protected Securities Fund's holdings is represented by the red bars. The blue bars represent the distribution of the market value of all outstanding TIPS maturing in 1 year or more (the 1+ index). [1]
Image
Not much has changed since two years ago. Vanguard's holdings are still fairly close to the 1+ index. But it does overweight some maturities (e.g., 2019 & 2026) and underweight others (e.g., 2018 [2], 2040, & 2041). Overall the Vanguard fund has a slightly lower average maturity and duration than the index, which means it has slightly less interest rate risk. It pays a tiny "price" for this reduced risk with a slightly lower yield to maturity (YTM) than the index (-0.12% vs -0.10%). This is shown in the table below:

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                          1+ Index     Vanguard
                          ---------    ---------
Avg Maturity              9.4 years    8.8 years
Avg Modified Duration     8.6%         8.1%
Avg Yield to Maturity    -0.10%       -0.12%
Here are all 37 TIPS maturing in more than one year with Vanguard's market value weighting compared to the index:

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                      ---Mkt Value Weight ---
 Maturity    Coupon   Index    Vang     Diff

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01/15/2018   1.625%   1.59%   0.00%   (1.59%)
02/15/2041   2.125%   2.89%   1.33%   (1.56%)
04/15/2029   3.875%   3.40%   2.16%   (1.24%)
04/15/2028   3.625%   2.82%   1.87%   (0.96%)
02/15/2040   2.125%   1.84%   1.03%   (0.81%)
02/15/2043   0.625%   1.97%   1.28%   (0.69%)
01/15/2025   2.375%   3.48%   2.95%   (0.53%)
02/15/2042   0.750%   2.08%   1.81%   (0.27%)
01/15/2026   2.000%   2.33%   2.13%   (0.20%)
02/15/2046   1.000%   1.38%   1.23%   (0.15%)
07/15/2018   1.375%   1.42%   1.28%   (0.15%)
01/15/2019   2.125%   1.44%   1.34%   (0.10%)
04/15/2018   0.125%   4.30%   4.19%   (0.10%)
07/15/2020   1.250%   3.12%   3.01%   (0.10%)
01/15/2021   1.125%   3.51%   3.41%   (0.10%)
01/15/2028   1.750%   1.72%   1.72%    0.00% 
04/15/2032   3.375%   0.81%   0.84%    0.03% 
01/15/2020   1.375%   1.83%   1.86%    0.03% 
02/15/2044   1.375%   2.31%   2.35%    0.04% 
07/15/2019   1.875%   1.50%   1.65%    0.15% 
01/15/2029   2.500%   1.65%   1.80%    0.16% 
01/15/2022   0.125%   3.66%   3.82%    0.16% 
02/15/2045   0.750%   1.98%   2.21%    0.23% 
07/15/2026   0.125%   2.05%   2.30%    0.26% 
07/15/2021   0.625%   3.29%   3.56%    0.28% 
01/15/2027   2.375%   1.97%   2.30%    0.33% 
07/15/2022   0.125%   3.59%   3.93%    0.34% 
07/15/2023   0.375%   3.59%   3.97%    0.38% 
01/15/2023   0.125%   3.55%   3.93%    0.38% 
07/15/2025   0.375%   3.51%   3.90%    0.38% 
01/15/2024   0.625%   3.63%   4.02%    0.39% 
07/15/2024   0.125%   3.45%   3.89%    0.45% 
01/15/2025   0.250%   3.47%   3.92%    0.45% 
04/15/2021   0.125%   2.62%   3.11%    0.48% 
04/15/2020   0.125%   4.28%   4.77%    0.49% 
04/15/2019   0.125%   4.26%   5.49%    1.23% 
01/15/2026   0.625%   3.70%   5.62%    1.92%
                    ------- -------    -----
Total               100.00% 100.00%    0.00%
  1. Vanguard data comes from clicking Portfolio holdings on the Vanguard Inflation-Protected Securities Fund Portfolio tab. The 1+ index data comes from my Yield to Maturity and Duration Calculator with WSJ TIPS Prices 9/30/2016. See this post for 9/30/2016 metrics on 0-5, 1-5, 1-10, and 15+ indexes as well as the 1+ index.
  2. 2018 is underweight because Vanguard holds none of the TIPS maturing 1/15/2018. It holds some of every other TIPS maturing in more than one year.
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