Help with selecting/understanding TIPS fund

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nyinca
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Help with selecting/understanding TIPS fund

Post by nyinca » Sat Jun 15, 2013 4:05 pm

Hi everyone,

I have posted before regarding living in CA and having an HSA through which I would like to invest in a TIPS fund (to avoid state tax in HSA in CA). The rest of my portfolio is balanced to the AA that I want between stocks/bonds thru my 401k/Roth/Taxable.

I want to add TIPS but am still a newbie, so would appreciate info on the following:

1) YTD performance of TIPS fund. Is a negative YTD worth looking at for performance? What factors affect a positive/negative effect when the purpose is to keep up with inflation? Am I looking at the wrong parameter to determine which TIPS fund to invest in?

2) Advantage/Disadvantage of short/intermedi/long term TIPS fund. I anticipate holding onto the TIPS fund for a number of years through my HSA as part of my overall portfolio (I currently pay for healthcare with post tax dollars and am looking at HSA as an investment vehicle for tax advantaged space)

3) My HSA is thru a brokerage with Fidelity so I am open to various options. I appreciate past suggestions including

Spartan® Inflation-Protected Bond Index Fund - Investor Class - FSIQX 0.20% Expense Ratio with $2,500 minimum
Spartan® Inflation-Protected Bond Index Fund - Advantage Class - FSIYX : 0.10% Expense Ratio with $10,000 minimum
Vanguard 0-5 Year TIPS ETF - VTIP: 0.10% Expense Ratio

4) I currently have about 7K in my HSA but will hit 10,000 by the end of the year. If I decide to go Spartan, is better to just wait to hit 10,000 in HSA to get the lower ER with Advantage Class or buy Investor Class now and exchange to Advantage class when I hit 10,000? (or would selling from Investor to Advantage create taxable income for my HSA in the state of CA?)

Thanks in advance for the help.

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grabiner
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Re: Help with selecting/understanding TIPS fund

Post by grabiner » Sat Jun 15, 2013 6:12 pm

nyinca wrote:1) YTD performance of TIPS fund. Is a negative YTD worth looking at for performance? What factors affect a positive/negative effect when the purpose is to keep up with inflation? Am I looking at the wrong parameter to determine which TIPS fund to invest in?
The YTD performance of a TIPS fund reflects what has happened to the TIPS market. TIPS rates have gone up significantly in the last few months, and rising rates cause bond prices to fall. Therefore, a fund with a high YTD loss is not inherently bad, just one which held longer-term TIPS.
2) Advantage/Disadvantage of short/intermedi/long term TIPS fund. I anticipate holding onto the TIPS fund for a number of years through my HSA as part of my overall portfolio (I currently pay for healthcare with post tax dollars and am looking at HSA as an investment vehicle for tax advantaged space)
3) My HSA is thru a brokerage with Fidelity so I am open to various options. I appreciate past suggestions including

Spartan® Inflation-Protected Bond Index Fund - Investor Class - FSIQX 0.20% Expense Ratio with $2,500 minimum
Spartan® Inflation-Protected Bond Index Fund - Advantage Class - FSIYX : 0.10% Expense Ratio with $10,000 minimum
Vanguard 0-5 Year TIPS ETF - VTIP: 0.10% Expense Ratio
These look like the best choices for interemediate-term and short-term TIPS. If you want longer term, look at LTPZ, PIMCO's long-term TIPS fund, at 0.20%. LTPZ has a higher yield, but will be much more volatile; consider it only if you won't be touching the HSA for a long time; this seems to be your intetion.
4) I currently have about 7K in my HSA but will hit 10,000 by the end of the year. If I decide to go Spartan, is better to just wait to hit 10,000 in HSA to get the lower ER with Advantage Class or buy Investor Class now and exchange to Advantage class when I hit 10,000? (or would selling from Investor to Advantage create taxable income for my HSA in the state of CA?)
Fidelity should upgrade you to Advantage class, and a share-class conversion is not considered a sale, so there is no reason to wait. (Vanguard does the same thing when you upgrade to Admiral, or convert your mutual fund shares to ETF shares.)
Wiki David Grabiner

nyinca
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Re: Help with selecting/understanding TIPS fund

Post by nyinca » Sat Jun 15, 2013 6:49 pm

Thank you for the information.

What makes a TIPS fund (LTPZ) more volatile? The length of duration?

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grabiner
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Re: Help with selecting/understanding TIPS fund

Post by grabiner » Sat Jun 15, 2013 7:29 pm

nyinca wrote:Thank you for the information.

What makes a TIPS fund (LTPZ) more volatile? The length of duration?
Yes. LTPZ holds only TIPS which are 15+ years to maturity, and PIMCO gives it a 13.83-year duration; thus, if TIPS rates rise by 1%, LTPZ will lose 13% of its value.

And you can see this effect in recent performance; LTPZ lost 14% from April 26 through June 13, while the intermediate-term TIPZ, with a 6.28-year duration, lost 7%, and the short-term STPZ, with a 2.19-year duration, lost only 2%.
Wiki David Grabiner

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Tyr0ne
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Re: Help with selecting/understanding TIPS fund

Post by Tyr0ne » Sat Jun 15, 2013 9:28 pm

This Vanguard paper on TIPS helped me understand TIPS a little better and helped me choose what type of TIPS fund I ultimately bought.
There are times when, at least for now, one must be content to love the questions themselves - Neil deGrasse Tyson

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Re: Help with selecting/understanding TIPS fund

Post by #Cruncher » Sun Jun 16, 2013 8:59 am

grabiner wrote:LTPZ holds only TIPS which are 15+ years to maturity, and PIMCO gives it a 13.83-year duration ... the intermediate-term TIPZ, with a 6.28-year duration ... and the short-term STPZ, with a 2.19-year duration ...
I don't trust the duration figure of 13.83 that PIMCO reports for LTPZ on its web page; it is too low. Since the fund holds only 7 TIPS, it's relatively easy to calculate the weighted average duration oneself. Here it is using the weightings * from the Composition tab, yields from WSJ TIPS Quotes 6/14/2013, and the Excel MDuration function. It shows a weighted average of 18.45, significantly more than 13.83.

Code: Select all

  Matures   Coupon   Weight    Yield   Mod Dur 
----------  ------   ------    -----   -------
01/15/2029   2.500   11.20%    0.646    13.20
04/15/2029   3.875   22.91%    0.633    12.68
04/15/2032   3.375    6.08%    0.786    14.90
02/15/2040   2.125   11.34%    1.040    21.03
02/15/2041   2.125   18.27%    1.059    21.65
02/15/2042   0.750   12.73%    1.113    25.46
02/15/2043   0.625    4.36%    1.125    26.68
                     ------    -----   -------
Total / Wtd Avg      86.89%    0.883    18.45
I also question the durations PIMCO reports for its other TIPS funds: 6.28 for TIPZ and 2.19 for STPZ. The inconsistency of reported duration by PIMCO and other TIPS fund managers is one reason I started the thread, Consistent Yield & Duration to Help Choose TIPS Fund. My last update as of 6/7/2013 shows the average duration for the 1+ index (TIPZ) at 8.51 and the 1-5 years index (STPZ) at 2.96. In my opinion these are better estimates than the ones reported by PIMCO.

* By the way, clicking "View all holdings" on the Composition tab brings up a window that says 13% of the fund's holdings are "Net Cash". I'm ignoring this in the weighting. (I sum the product of Weight and Mod Dur and then divide by 86.89%.) But it does make one wonder how well the fund can track an index when that much of its assets are in cash.

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