Short Term TIPS Fund

[jsl11]

I note that we have not had much discussion concerning Vanguard's new short term tips fund. It seems that this would be of interest to an investor who wants to have an allocation to a TIPS fund, but is concerned about the interest rate risk associated with Vanguard's original TIPS fund. Should a retiree consider changing from the original TIPS fund to the short term fund? Does the .25% purchase fee for the ST fund affect this decision? It seems that most investors in the original TIPS fund would have unrealized cap gains. However, if the holding is in an IRA account, this would not matter. What is your opinion on the such a fund exchange?

Jeff

[tfb]

I note that we have not had much discussion concerning Vanguard's new short term tips fund.

There were many threads last year. Just type "Short Term TIPS Fund" in the search box on top right and you will see them. For instance:

Will You Use the New Vanguard Short-Term TIPS Index Fund?

[jsl11]

I note that we have not had much discussion concerning Vanguard's new short term tips fund.

There were many threads last year. Just type "Short Term TIPS Fund" in the search box on top right and you will see them. For instance:

Will You Use the New Vanguard Short-Term TIPS Index Fund?

thanks!

[Noobvestor]

I note that we have not had much discussion concerning Vanguard's new short term tips fund.

There were many threads last year. Just type "Short Term TIPS Fund" in the search box on top right and you will see them. For instance:

Will You Use the New Vanguard Short-Term TIPS Index Fund?

FWIW, I have read over a dozen of those threads and still can't answer *basic questions* like: what happens during extended/hyperinflation when your short notes roll over faster than long ones, forcing you more quickly to buy back into worse yields (presumably)? Has anyone run various actual scenarios to see how long vs. short will (or at least should) react under different conditions? I feel like I should be able to answer these but I can't. I've read the Vanguard study and still don't get it. Maybe I'm just dense. Can someone explain it like I'm five?

My thoughts in a nutshell: going out way further on the yield curve for .5% yield looks pretty silly unless you get something else aside from that added yield - I've been assuming that 'something else' might be better protection in certain drawn-out or hyperinfation scenarios (e.g. longer rollover time and/or TIPS ceasing to be issued). Are these valid concerns? I would really like to keep ONE thread going on this long enough to get solid answers from, among others, Rick Ferri, Larry Swedroe, William Bernstein, and any other folks (be they authors or otherwise).

Would love to see some of the gurus do blog posts, or someone pull up some various-situation data to support various positions on the yield curve for TIPS, now and/or otherwise.

[Taylor Larimore]

I note that we have not had much discussion concerning Vanguard's new short term tips fund. It seems that this would be of interest to an investor who wants to have an allocation to a TIPS fund, but is concerned about the interest rate risk associated with Vanguard's original TIPS fund. Should a retiree consider changing from the original TIPS fund to the short term fund? Does the .25% purchase fee for the ST fund affect this decision? It seems that most investors in the original TIPS fund would have unrealized cap gains. However, if the holding is in an IRA account, this would not matter. What is your opinion on the such a fund exchange?

Jeff

jsl11:

I think the decision whether to own a short-term TIPS fund vs the original intermediate term-TIPS is similiar to the decision whether to own a short-term traditional bond fund or intermediate-term traditional bond fund. It is not an easy decision because It reflects the usual bond risk/return tradoff.

For many years we have held a 50/50 combo of Total Bond Market and TIPS (VIPSX) which has been very satisfactory and we are reluctant to change. Nevertheless, I will probably replace our intermediate-term TIPS with the new shorter-term TIPS for these reasons:

* When Vanguard experts decided to exchange to the short-term TIPS in their fund-of-funds, I take notice. They know a lot more than I do about complex TIPS.

* The prospect for higher inflation suggest a shorter overall term in our bonds may be advisable.

* As an older retiree, preservation of our savings is much more important than taking unneeded risk in hopes of higher return.

* Our TIPS fund represent a substantial percentage of our portfolio.

* In my opinion, the 0.25% purchase fee is meaningless compared with the risk/return aspects of a bond fund held for several years.

There is more than one road to Dublin.

Best wishes.
Taylor

[Browser]

Maybe this Vanguard paper offers some insight:

Short-term TIPS have been much less volatile than long-term TIPS and much less sensitive to changes in real interest rates. Now, this has two results. So, first it allows the income payments that are sensitive to inflation to drive a much larger proportion of the short-term TIPS return. Because the price isn't moving around due to real interest rate changes, you get more of that income and see more of that inflation sensitivity.

The other aspect that increases short-term TIPS' sensitivity to inflation is the fact that their prices are driven more by movements in inflation expectations themselves. So, when you have a move in inflation, short-term TIPS reflect that information much better than long-term TIPS do.

Along with this observation from Ben Inker at GMO

TIPS have been lovely diversifiers historically, and this has led them to be included in more and more portfolios over time. Their effectiveness as diversifiers may well be less in the future and their returns quite likely to be lower.

Putting these together, we might conclude that the term risk premium for extending out TIPS maturities is not very attractive at this time, and the primary reason for holding TIPS at all is to provide inflation protection. You get better inflation tracking with short term TIPS with low term risk. Maybe that's behind Vanguard's thinking.

[dbr]

I think the decision whether to own a short-term TIPS fund vs the original intermediate term-TIPS is similiar to the decision whether to own a short-term traditional bond fund or intermediate-term traditional bond fund. It is not an easy decision because It reflects the usual bond risk/return tradoff.


Best wishes.
Taylor

I agree that the whole issue is here. On that note it is simply you pays yer money and you takes yer choice.

What happens in true hyperinflation, I have no idea except that I don't think what duration TIPS you are in is going to be of much importance relative to everything else in that scenario.