Investing in TIPS (SCHP)

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randy1k4
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Investing in TIPS (SCHP)

Post by randy1k4 »

Hi folks,

So I have a little bit of money that is sitting in my checking account earning less than 0.1% APY, and I've decided to invest that money in a TIPS ETF (in my case, SCHP). I am not taking any counter-party risk (since the securities are backed by the full faith and credit of the U.S.), the current yield is above 1%, and, in the scenario where inflation becomes problematic, I'd be protected. The ETF itself has a low expense ratio (0.05%).

Am I missing something here? If I don't need the liquidity, why would I (or anyone) keep my money in a savings / checking account

Here is the fact sheet for https://www.schwabassetmanagement.com/r ... fact-sheet.
sycamore
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Re: Investing in TIPS (SCHP)

Post by sycamore »

The fund is a collection of bonds and does not have a stable value like a savings account does. The fund has an intermediate average duration (about 7 years) which means its net asset value will fluctuate a fair amount when/if interest rates rise. E.g., if rates for intermediate bonds go up 1%, the net asset value of the fund would drop roughly 7%. Eventually the increased bond rates would make up for the drop in principal.

If the money in question is intended to be used in the intermediate to long term, using SCHP is an okay choice. But if you intend to use the money in the next few years, it's better to keep the money in savings/checking or a short term bond fund.
MishkaWorries
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Re: Investing in TIPS (SCHP)

Post by MishkaWorries »

Have you looked into I-bonds? That would be a much better substitute for an HYSA if you can accept the one year lockup provision.
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hudson
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Re: Investing in TIPS (SCHP)

Post by hudson »

I agree with sycamore.
It looks like a good ETF with low expenses, all US treasuries. I'd buy it if it matched with my needs for inflation protection.
Does your duration match the funds 7.9 year effective duration?
Ten year treasuries are worth a look...again if they fit your duration needs.

Matching duration: viewtopic.php?t=318412
Last edited by hudson on Mon May 03, 2021 6:33 am, edited 1 time in total.
HerbsKid
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Re: Investing in TIPS (SCHP)

Post by HerbsKid »

In a rising-rate environment, SCHP, with an average duration of 7.9 years, has some risk of decline in NAV.
Some alternatives to consider are Short-duration TIPS ETFs: STIP, VTIP, STPZ
These ETFs are composed of TIPS with maturities less than 3-5 years (check their profiles for specifics).

They will have less risk of negative total return as interest rates rise.
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nisiprius
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Re: Investing in TIPS (SCHP)

Post by nisiprius »

I personally like TIPS and have over half of my fixed income invested in a Vanguard TIPS fund--VAIPX--which is virtually the same as SCHP. But I am not treating it as a substitute for a savings account.

SCHP is obviously a "good" fund in the sense of having low costs and doing its job of meeting its specific goal, "to track as closely as possible, before fees and expenses, the total return of the Bloomberg Barclays US Treasury Inflation-Linked Bond Index (Series-L)," but the question is how that index, (and thus the fund) behaves.

Bond funds fluctuate far, far less than stock funds, but they do fluctuate. The key figure here is not the current yield. The thing you want to think about is the "duration." And you want to spend some quality time looking at the growth chart, which I'll get to in a second.

If we go to Schwab's web page, SCHP, fairly near the top you'll find it:

Image

What does that mean? There are no absolutes and no guarantees, but it means 7.4 years is the appropriate holding period if you want fluctuations up and down to balance out. It is also a holding period over which it is very unlikely that you will actually lose money.

Now if you scroll a little farther down you'll find my favorite kind of chart, a "growth chart." Like a bank account in which interest accumulates, a growth chart shows how your money grows if you leave it in this fund, with dividends reinvested. If you open an account at Schwab, put $10,000 into SCHP, and don't do anything else, this is the number you'd see as your account balance.

Image

They helpfully show the worst three-month period in the history of the fund: Worst Three Months Return (4/30/2013 - 7/31/2013) -7.11%. So if you'd bought $10,000 worth of the ETF on 4/30/2013, three months later you'd have seen $9,289. And if you look rightward from that point and count years on your fingers, you see that it took about six years to get back to $10,000. So the rule of thumb that "there's almost no chance of loss if you hold for 7.4 years" was correct, but only just barely.

If you compare that to a savings account, your reaction is probably "wow! A 7% loss!" But if you compare it to practically any stock fund, your reaction might be "only a 7% loss!"

Some other things we can find from Schwab's web page are that the green and gray lines stayed very close together, meaning that SCHP did a good job of meeting its stated goal of tracking the index; and that it did better than the black line, which is Morningstar's data for the average TIPS fund.

There is much more that can be said, but I think that's enough for now.
Last edited by nisiprius on Mon May 03, 2021 9:22 pm, edited 1 time in total.
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nisiprius
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Re: Investing in TIPS (SCHP)

Post by nisiprius »

I guess I'll add that the reason why someone might use a savings or checking account if "they don't need the liquidity" is that they want an account in which the balance literally never goes down. And that does raise an interesting question. Series I savings bonds also have the characteristic of a) never going down, and b) being inflation-adjusted. They have two "liquidity" issues; one is that you cannot redeem them for a full year after buying them, and the other is that there is a small penalty, 3 months' interest, if you redeem them in less than five years.

Again, there is a lot that can be said about I bonds, pro and con. Quickly, without including all details, you pretty much need to open a special account at Treasury Direct; they don't make a ton of money, but anyone can look at the numbers for themselves and decide; and you aren't allowed to buy more than $10,000 a year. But they are pretty darn good, and in my opinion the reason you don't hear much about them is that there's no way for investment firms, banks, or financial advisors to make much money from them.

You'll find that truly independent finance writers usually mention them and praise them, but investing guides from people more or less aligned with brokerages, ETF providers, or advisors just somehow forget to include them.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
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