"Vanguard Inflation-Protected Securities Is a Top Pick."

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gkaplan
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"Vanguard Inflation-Protected Securities Is a Top Pick."

Post by gkaplan » Sun Nov 20, 2016 3:51 pm

Vanguard Inflation-Protected Securities is an excellent choice for investors looking for a pure-play inflation hedge. Its fees are among the lowest for open-end mutual funds and exchange-traded funds; it has excellent long-term performance; and it benefits from Vanguard’s strong stewardship. For these reasons, it earns a Morningstar Analyst Rating of Gold.

Gemma Wright-Casparius took over as lead portfolio manager in April 2012, maintaining the fund’s long-standing process--and that’s a good thing. The fund stays close to its benchmark, the Barclays US Treasury US Tips Index, and lets its low fees contribute to returns. However, Wright-Casparius has the ability to add or remove risk relative to the benchmark when her team has high conviction about a particular trade, so it is not a true index fund.

Unlike many funds in the inflation-protected bond Morningstar Category, this one does not court additional risk by looking for extra sources of return in commodities, high-yield bonds, or other assets. The fund is meant to act as a diversifier from nominal Treasuries and as pure exposure to an inflation hedge, and adding different assets would dilute those effects. This also brings the fund more in line with ETFs, which have pure benchmark exposure.

One thing to be aware of with most funds that invest in Treasury Inflation-Protected Securities is that their duration can run longer than a comparable nominal bond fund, especially with many active managers shortening their duration in anticipation of rate hikes. This holds true for this fund, which has an 8.3-year duration, making it highly sensitive to changes in interest rates. . . .

http://news.morningstar.com/articlenet/ ... ?id=781043
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Re: "Vanguard Inflation-Protected Securities Is a Top Pick."

Post by RadAudit » Sun Nov 20, 2016 9:05 pm

Thanks for the link
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Re: "Vanguard Inflation-Protected Securities Is a Top Pick."

Post by nbseer » Sun Nov 20, 2016 9:11 pm

"... this fund, which has an 8.3-year duration, making it highly sensitive to changes in interest rates. . . ."

Which is why I will stay away from this... look at the last two weeks.. TIPS instruments seem to have fallen just as badly as other bond funds, and interest rates have only begun to rise.

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Re: "Vanguard Inflation-Protected Securities Is a Top Pick."

Post by sport » Sun Nov 20, 2016 9:37 pm

nbseer wrote:"... this fund, which has an 8.3-year duration, making it highly sensitive to changes in interest rates. . . ."

Which is why I will stay away from this... look at the last two weeks.. TIPS instruments seem to have fallen just as badly as other bond funds, and interest rates have only begun to rise.
This is also why Vanguard has a short term TIPS fund which is much less sensitive to changes in interest rates.

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Re: "Vanguard Inflation-Protected Securities Is a Top Pick."

Post by grabiner » Sun Nov 20, 2016 10:12 pm

nbseer wrote:"... this fund, which has an 8.3-year duration, making it highly sensitive to changes in interest rates. . . ."

Which is why I will stay away from this... look at the last two weeks.. TIPS instruments seem to have fallen just as badly as other bond funds, and interest rates have only begun to rise.
But this also shows the difference between durations of nominal and inflation-adjusted bonds. Vanguard Inflation-Protected Securities (duration 8.3 years) has fallen about the same amount as Vanguard Total Bond Market Index (duration 5.8 years). Real rates have not fallen as much as nominal rates.
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Re: "Vanguard Inflation-Protected Securities Is a Top Pick."

Post by jalbert » Sun Nov 20, 2016 11:20 pm

Contrary to (my interpretation of) the M* position statement, this fund is actively managed and does not always hold 100% TIPs. It is required to hold at least 80% of its assets in TIPs:

https://personal.vanguard.com/us/FundsS ... IntExt=INT

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Re: "Vanguard Inflation-Protected Securities Is a Top Pick."

Post by gkaplan » Mon Nov 21, 2016 10:54 am

jalbert wrote:Contrary to (my interpretation of) the M* position statement, this fund is actively managed and does not always hold 100% TIPs. It is required to hold at least 80% of its assets in TIPs:

https://personal.vanguard.com/us/FundsS ... IntExt=INT

The fund's 06/30/2016 semi-annual report shows the fund holds 99.6% TIPS. Is that close enough for you?

https://personal.vanguard.com/funds/rep ... 2210117835
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Re: "Vanguard Inflation-Protected Securities Is a Top Pick."

Post by Munir » Mon Nov 21, 2016 10:59 am

According to M*, VIPSX has done better than other Vanguard intermediate bond funds during the last month. But does that mean it will outperform on a long term basis as a core bond fund?

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Re: "Vanguard Inflation-Protected Securities Is a Top Pick."

Post by camaro327 » Mon Nov 21, 2016 2:23 pm

I'm not a big fan of this fund. The expense ratio is too high unless you have enough for Admiral Shares and if you have enough for Admiral Shares, I think someone would be better off with a mix of I bonds and individual Tips. It wouldn't take much effort to build a small Tips ladder.

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Re: "Vanguard Inflation-Protected Securities Is a Top Pick."

Post by jdb » Mon Nov 21, 2016 4:06 pm

Yes, thanks for the link. This fund has been one of the core holdings in our tax advantaged accounts for many years, reminds me of the Vanguard GNMA fund which is also one of our longtime core funds, under appreciated and oft maligned but seems to perform relatively well over the years despite the abuse. Though agree with another poster as to a TIPS ladder, am slowly applying funds from Admiral class to a ladder of 10 year TIPS at auctions.

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Re: "Vanguard Inflation-Protected Securities Is a Top Pick."

Post by jalbert » Mon Nov 21, 2016 9:47 pm

gkaplan wrote:
jalbert wrote:Contrary to (my interpretation of) the M* position statement, this fund is actively managed and does not always hold 100% TIPs. It is required to hold at least 80% of its assets in TIPs:

https://personal.vanguard.com/us/FundsS ... IntExt=INT

The fund's 06/30/2016 semi-annual report shows the fund holds 99.6% TIPS. Is that close enough for you?

https://personal.vanguard.com/funds/rep ... 2210117835
They have held over 10% in nominal treasuries in this fund at times. I have no problem with that. I wasn't critiquing the fund. I was critiquing M*'s statement about it.

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Re: "Vanguard Inflation-Protected Securities Is a Top Pick."

Post by abuss368 » Tue Nov 22, 2016 1:19 pm

gkaplan wrote:
Vanguard Inflation-Protected Securities is an excellent choice for investors looking for a pure-play inflation hedge. Its fees are among the lowest for open-end mutual funds and exchange-traded funds; it has excellent long-term performance; and it benefits from Vanguard’s strong stewardship. For these reasons, it earns a Morningstar Analyst Rating of Gold.

Gemma Wright-Casparius took over as lead portfolio manager in April 2012, maintaining the fund’s long-standing process--and that’s a good thing. The fund stays close to its benchmark, the Barclays US Treasury US Tips Index, and lets its low fees contribute to returns. However, Wright-Casparius has the ability to add or remove risk relative to the benchmark when her team has high conviction about a particular trade, so it is not a true index fund.

Unlike many funds in the inflation-protected bond Morningstar Category, this one does not court additional risk by looking for extra sources of return in commodities, high-yield bonds, or other assets. The fund is meant to act as a diversifier from nominal Treasuries and as pure exposure to an inflation hedge, and adding different assets would dilute those effects. This also brings the fund more in line with ETFs, which have pure benchmark exposure.

One thing to be aware of with most funds that invest in Treasury Inflation-Protected Securities is that their duration can run longer than a comparable nominal bond fund, especially with many active managers shortening their duration in anticipation of rate hikes. This holds true for this fund, which has an 8.3-year duration, making it highly sensitive to changes in interest rates. . . .

http://news.morningstar.com/articlenet/ ... ?id=781043
Thank you for sharing Gordon! Do you still invest in the intermediate fund or did you move to the newer short term fund?
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Re: "Vanguard Inflation-Protected Securities Is a Top Pick."

Post by abuss368 » Tue Nov 22, 2016 1:20 pm

nbseer wrote:"... this fund, which has an 8.3-year duration, making it highly sensitive to changes in interest rates. . . ."

Which is why I will stay away from this... look at the last two weeks.. TIPS instruments seem to have fallen just as badly as other bond funds, and interest rates have only begun to rise.
Great point. I recall many years ago being in this fund and the NAV would drop by a large (for a bond fund) amount in a single day and I could not understand the reasons why. We removed the fund and have stayed the course with Total Bond and Intermediate Term Tax Exempt.
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Re: "Vanguard Inflation-Protected Securities Is a Top Pick."

Post by abuss368 » Tue Nov 22, 2016 1:21 pm

sport wrote: This is also why Vanguard has a short term TIPS fund which is much less sensitive to changes in interest rates.
Hi sport,

True, but I honestly have no idea how a retiree survives with this fund or makes it work. There has been close to ZERO in terms of cash flows from dividends! Hard to pay the bills with that (i.e. "Income Risks") as Jack Bogle has said.

Best.
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Re: "Vanguard Inflation-Protected Securities Is a Top Pick."

Post by abuss368 » Tue Nov 22, 2016 1:22 pm

gkaplan wrote:
jalbert wrote:Contrary to (my interpretation of) the M* position statement, this fund is actively managed and does not always hold 100% TIPs. It is required to hold at least 80% of its assets in TIPs:

https://personal.vanguard.com/us/FundsS ... IntExt=INT

The fund's 06/30/2016 semi-annual report shows the fund holds 99.6% TIPS. Is that close enough for you?

https://personal.vanguard.com/funds/rep ... 2210117835
Hi Gordon,

I am not sure if you are aware, but at one time the fund included nominal Treasuries in place of TIPS because of the challenging yield environment and possibly liquidity concerns.

Best.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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Re: "Vanguard Inflation-Protected Securities Is a Top Pick."

Post by sport » Tue Nov 22, 2016 6:28 pm

abuss368 wrote:
sport wrote: This is also why Vanguard has a short term TIPS fund which is much less sensitive to changes in interest rates.
Hi sport,

True, but I honestly have no idea how a retiree survives with this fund or makes it work. There has been close to ZERO in terms of cash flows from dividends! Hard to pay the bills with that (i.e. "Income Risks") as Jack Bogle has said.

Best.
I think the answer to this is that the short TIPS fund is for inflation insurance. You would need to use other funds for income. I also consider it to be somewhat temporary. At some future time, I plan to move back to the longer TIPS fund when I have less concern about rising interest rates. This is market timeing (I know I know), but I feel more comfortable with this.

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Re: "Vanguard Inflation-Protected Securities Is a Top Pick."

Post by abuss368 » Tue Nov 22, 2016 9:06 pm

sport wrote:
abuss368 wrote:
sport wrote: This is also why Vanguard has a short term TIPS fund which is much less sensitive to changes in interest rates.
Hi sport,

True, but I honestly have no idea how a retiree survives with this fund or makes it work. There has been close to ZERO in terms of cash flows from dividends! Hard to pay the bills with that (i.e. "Income Risks") as Jack Bogle has said.

Best.
I think the answer to this is that the short TIPS fund is for inflation insurance. You would need to use other funds for income. I also consider it to be somewhat temporary. At some future time, I plan to move back to the longer TIPS fund when I have less concern about rising interest rates. This is market timeing (I know I know), but I feel more comfortable with this.
I have never really understood the need for short term TIPS when compared to short term nominal bonds. Still there are essentially no cash flows from dividends from either TIPS fund.
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Re: "Vanguard Inflation-Protected Securities Is a Top Pick."

Post by Bfwolf » Tue Nov 22, 2016 9:16 pm

I am perplexed by people who point to significant volatility in TIPS funds when interest rates change and say "why would I own this?" TIPS don't offer interest rate protection. They offer inflation protection. Inflation has been low for a long time, so the inflation protection that TIPS provide hasn't been worth anything. YET. If inflation rears its head, TIPS will do very well compared to nominal bonds. And that's when you'll say "oh yeah, that's why I own TIPS" or "oh yeah, that's why I should own TIPS."

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Re: "Vanguard Inflation-Protected Securities Is a Top Pick."

Post by Phineas J. Whoopee » Tue Nov 22, 2016 10:20 pm

I'll post my opinion.

One should consider one's exposure to inflation risk. That doesn't mean trying to guess whether unexpected inflation is imminent. "I do not expect unexpected inflation" is not useful.

For anyone familiar with project management, I'm suggesting an impact, not a likelihood, risk analysis.

One should consider what might happen to themselves and their family should unexpectedly high inflation occur. If one has very secure employment with a salary that will reliably increase, in general, with inflation, the risk may be low. Radiologists, for example, do not qualify. The enormous drop in digital communication costs means anybody who's adequately skilled and certified can do the job from anywhere. The same goes for paralegals and instructors. Soon it may be possible, by robot, to provide a massage remotely.

The greater the family's exposure to inflation risk, the greater the case for including inflation-protected fixed income.

In my personal situation, I've concluded I'm highly exposed to inflation risk, therefore I've chosen an asset allocation of 25% US total stock market, 15% total international stock, 40% inflation-protected fixed income (a combination of TIPS and I Bonds), and 20% nominal fixed income.

How exposed to inflation risk are you?

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Re: "Vanguard Inflation-Protected Securities Is a Top Pick."

Post by baw703916 » Tue Nov 22, 2016 10:53 pm

abuss368 wrote: ... I honestly have no idea how a retiree survives with this fund or makes it work. There has been close to ZERO in terms of cash flows from dividends! Hard to pay the bills with that (i.e. "Income Risks") as Jack Bogle has said.
Sorry for the snark, but you do realize this is equivalent to saying that it's better for retirees to own only dividend paying stocks than TSM?

The only return is total return. If the cash flow is more than you need, reinvest the remainder. If the cash flow is less than you need, sell some shares to make up the difference.
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Re: "Vanguard Inflation-Protected Securities Is a Top Pick."

Post by tibbitts » Tue Nov 22, 2016 11:17 pm

baw703916 wrote:
abuss368 wrote: ... I honestly have no idea how a retiree survives with this fund or makes it work. There has been close to ZERO in terms of cash flows from dividends! Hard to pay the bills with that (i.e. "Income Risks") as Jack Bogle has said.
Sorry for the snark, but you do realize this is equivalent to saying that it's better for retirees to own only dividend paying stocks than TSM?

The only return is total return. If the cash flow is more than you need, reinvest the remainder. If the cash flow is less than you need, sell some shares to make up the difference.
Sorry not seeing the analogy. Stocks can have both capital appreciation and dividend income, or more or less of one vs. the other. I wouldn't expect bond funds to have capital appreciation (or depreciation) except temporarily. Income is all you would expect from bonds, so you can't really spend capital appreciation the way you can with stocks.

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Re: "Vanguard Inflation-Protected Securities Is a Top Pick."

Post by baw703916 » Tue Nov 22, 2016 11:25 pm

But it's not like TIPS have uniquely low yields (remember for TIPS the quoted yield is the real return, while for other bonds it's the real return + inflation). TIPS have low yields because bonds in general have low yields. One can go yield chasing, but that necessarily involves taking on risks. So if you want a higher return, you have to take on some combination of equity risk, term risk, credit risk, or inflation risk.
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Re: "Vanguard Inflation-Protected Securities Is a Top Pick."

Post by Bfwolf » Wed Nov 23, 2016 1:22 am

tibbitts wrote:
baw703916 wrote:
abuss368 wrote: ... I honestly have no idea how a retiree survives with this fund or makes it work. There has been close to ZERO in terms of cash flows from dividends! Hard to pay the bills with that (i.e. "Income Risks") as Jack Bogle has said.
Sorry for the snark, but you do realize this is equivalent to saying that it's better for retirees to own only dividend paying stocks than TSM?

The only return is total return. If the cash flow is more than you need, reinvest the remainder. If the cash flow is less than you need, sell some shares to make up the difference.
Sorry not seeing the analogy. Stocks can have both capital appreciation and dividend income, or more or less of one vs. the other. I wouldn't expect bond funds to have capital appreciation (or depreciation) except temporarily. Income is all you would expect from bonds, so you can't really spend capital appreciation the way you can with stocks.
But he's right. The only return that matters is total return. So your argument is that TIPS total return has been less than similar nominal bonds. Which is what one would expect in an era of extremely low inflation. You'll quickly find out how hard it is to "pay the bills" if you are heavy on nominal bonds (EDIT: I originally accidentally said stocks instead of bonds here) earning a 2% yield and inflation jumps to 6%.

Past performance does not necessarily predict future results.
Last edited by Bfwolf on Fri Nov 25, 2016 12:17 am, edited 1 time in total.

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Re: "Vanguard Inflation-Protected Securities Is a Top Pick."

Post by grabiner » Wed Nov 23, 2016 5:15 pm

Bfwolf wrote:
tibbitts wrote:
baw703916 wrote:The only return is total return. If the cash flow is more than you need, reinvest the remainder. If the cash flow is less than you need, sell some shares to make up the difference.
Sorry not seeing the analogy. Stocks can have both capital appreciation and dividend income, or more or less of one vs. the other. I wouldn't expect bond funds to have capital appreciation (or depreciation) except temporarily. Income is all you would expect from bonds, so you can't really spend capital appreciation the way you can with stocks.
But he's right. The only return that matters is total return. So your argument is that TIPS total return has been less than similar nominal bonds. Which is what one would expect in an era of extremely low inflation. You'll quickly find out how hard it is to "pay the bills" if you are heavy on nominal stocks earning a 2% yield and inflation jumps to 6%.
And this is particularly relevant for TIPS, because total return exceeds inflation by a known amount. If you have $1M in a TIPS fund yielding 1%, and inflation is zero, the distribution will be $10K. If you need to spend $40K, you must sell $30K of TIPS, retaining a portfolio worth $970K. If inflation is 3%, the distribution will be $40K. You can spend this whole distribution without "invading principal", but your principal of $1M will be worth $970K in the previous year's dollars, so you have lost the same 3% of your real portfolio value.
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