VTAPX, Short-term TIPS Dividend Variations

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
Carsson3
Posts: 153
Joined: Tue Nov 08, 2022 4:44 pm

VTAPX, Short-term TIPS Dividend Variations

Post by Carsson3 »

I have read a short book on TIPS, plus some Vanguard articles on TIPS, and think I understand individual TIPS fairly well. I have some insight into TIPs funds. But not as much insight as I had thought, apparently. [I choose funds over individual TIPS, which is a different discussion please.]

Does anyone have a good understanding of why the quarterly dividends are so variable for TIPS funds, especially of the short term variety?
For VTAPX, Vanguard Short-term IPS Admiral, see below the last six quarterly dividends in cents per share, including 1Q 2024, and in order of the latest first: 0.012, 0.319 (4Q). 0.170, 0.174, 0.013, 0.559 (4Q). The most recent quarter over quarter dividend is down 96%. Odd.

Obviously a large number of factors influence the market price for a short-term TIPS fund: Nominal interest rates, actual inflation month to month, inflation expectations, the animal spirits for stocks, the dollar's standing internationally, and others. But I see no 'big enough' red flags historically in any of these numbers over the last six months.

So why are these variations in dividend rates gigantic? And why heavy Decembers for a quarterly fund? 'They' are engineering that, it looks like, they have to be. Truth is, I thought a near 2% real yield at my purchase price would deliver 2% plus inflation as a routine dividend. Wrong. Naive, but how?

My best guess is fund mechanics and non-obvious fund management strategies are involved, since per Sherlock Holmes the other main potential causes are eliminated (by not being proportionally changed in the same time frame). I was trying to chat with Vanguard on this earlier today, but their chat software was breaking down. Eventually, there is always the next fund report.
User avatar
Svensk Anga
Posts: 1647
Joined: Sun Dec 23, 2012 4:16 pm

Re: VTAPX, Short-term TIPS Dividend Variations

Post by Svensk Anga »

TIPS funds distribute the coupon payments they collect from the bonds they hold plus the inflation adjustments to principal, less the fund expenses. The coupons and expenses will be steady, but the inflation adjustments vary widely. Some months, especially November and December, can have negative CPI-U movements, before seasonal adjustments, which is what TIPS use. The worst inflation of the year is typically January -March, so expect better dividends following that. BTW, there is some lag from the month the inflation occurred to the reporting date to the TIPS value adjustment date. For instance, inflation for March will be reported on April 10 and will be used to adjust TIPS bond values daily throughout May.

The funds are required to distribute the investment income they receive every year. I would imagine that they do a true up in the 4th quarter payment making it more likely to be an outlier.

Your funds may have a yield of 2%, but part of that will come from bonds valued below par appreciating toward par value as they get closer to maturity. Fund NAV should trend upward. Many bonds are currently priced below par, because interest rates are now higher than when the bonds were issued. You can see the prices daily in the Wall Street Journal here: https://www.wsj.com/market-data/bonds/tips Check to see if the bonds in the maturity range of your fund are priced below $100. If so, part of the yield is coming from price appreciation rather than dividends.

TIPSwatch.com publishes a report on the day the monthly CPI values come out. I like to look at that to see what inflation adjustments are in the pipeline. The site is also a good source for all things TIPS and I-series savings bonds.
loukycpa
Posts: 801
Joined: Wed Aug 05, 2020 9:52 am

Re: VTAPX, Short-term TIPS Dividend Variations

Post by loukycpa »

Svensk Anga wrote: Tue Apr 02, 2024 9:40 pm
Your funds may have a yield of 2%, but part of that will come from bonds valued below par appreciating toward par value as they get closer to maturity. Fund NAV should trend upward. Many bonds are currently priced below par, because interest rates are now higher than when the bonds were issued. You can see the prices daily in the Wall Street Journal here: https://www.wsj.com/market-data/bonds/tips Check to see if the bonds in the maturity range of your fund are priced below $100. If so, part of the yield is coming from price appreciation rather than dividends.
Question on this. You are describing "bond market discount". My understanding is when you hold a bond directly, bond market discount from secondary market purchases is ultimately taxed at ordinary income rates, and that the holder of a bond can elect to pick it up in income over the term of the bond or wait until the bond matures, but either way it is ordinary income not capital gain. Is that accurate?

I would think if you own a mutual fund or ETF it is really hard to know where the fund is on this, because you don't know when the fund purchased the bonds in the portfolio. A lot of the bonds held by this fund were likely owned by the fund before real rates increased, so perhaps not a lot of accretion for the fund to recognize.

Tax is my day job so I'm starting on third base on these issues, but trying to confirm my understanding. This crap can be a bit complicated.
"The safe assumption for an investor is that over the next hundred years, the currency is going to zero." - Charlie Munger
Gaston
Posts: 1243
Joined: Wed Aug 21, 2013 7:12 pm

Re: VTAPX, Short-term TIPS Dividend Variations

Post by Gaston »

loukycpa wrote: Wed Apr 03, 2024 7:48 am Tax is my day job so I'm starting on third base on these issues, but trying to confirm my understanding. This crap can be a bit complicated.
I agree. I don't look at TIPS too often, but when I do I seem to have to re-learn how they work. Too bad the Treasury didn't come up with a simpler design for the product, maybe something closer to Treasury I Bonds.
“My opinions are just that - opinions.”
Topic Author
Carsson3
Posts: 153
Joined: Tue Nov 08, 2022 4:44 pm

Re: VTAPX, Short-term TIPS Dividend Variations

Post by Carsson3 »

Svensk Anga wrote: Tue Apr 02, 2024 9:40 pm TIPS funds distribute the coupon payments they collect from the bonds they hold plus the inflation adjustments to principal, less the fund expenses. The coupons and expenses will be steady, but the inflation adjustments vary widely.
I typically understand many or most of the bits and pieces of TIPS and their funds, but your response helps me pull them all into one focus, which is always my problem.

You identify the following major factors in dividend determinations, which I characterize below in terms of each one’s more likely variation month to month.

#1. Coupon payments received by the fund: Monthly variation likely not high.
#2. Inflation adjustments to principal: Monthly variation can be high.
#3. Fund expenses: Monthly variation likely not high, but accounting timing is unknown.
#4. Discount bond appreciation toward par: Monthly variation likely not high.

Based on the above, #2 inflation adjustments to principal is key to major TIPS fund dividend variation in any given year, which you seem to believe as well.

Counterpoint:
But isn’t actual deflation required to reduce a TIPS bond’s adjusted principal?
And if the principal is not reduced, then the coupon amount would not be reduced by that factor, so even a large variation in actual inflation (in the absence of actual deflation) cannot explain the large reduction of the dividend?

Since funds have to create tax liabilities artificially by selling holdings, so as to match the tax liability accumulations of individual TIPS, I wonder if a TIPS fund’s selling at a loss for this reason, and also to meet redemptions, could be a significant factor in a quarter’s dividend collapse. I totally agree with the other poster: The complexity level of TIPS and their funds is just too high, which may or may not be creating opportunity in the market.
Geologist
Posts: 3120
Joined: Fri Jan 02, 2009 6:35 pm

Re: VTAPX, Short-term TIPS Dividend Variations

Post by Geologist »

The interest income is not simply coupon payments as described earlier. Bond funds work on accrual accounting, so they accrue interest daily for the bonds they own.

Here is the description from the annual report of how income is determined:

"Interest income includes income distributions received from Vanguard Market Liquidity Fund and is accrued daily. Premiums and discounts on debt securities are amortized and accreted, respectively, to interest income over the lives of the respective securities, except for premiums on
certain callable debt securities that are amortized to the earliest call date. Inflation adjustments to the face amount of inflation-indexed securities are included in interest income."

The interest accrual is a function of both the coupon and the principal value of the inflation-indexed security (the interest payment goes up, if the TIPS principal value goes up).

Expenses are charged daily against the net assets (and hence the NAV).

There is some historical evidence that TIPS funds (not just Vanguard) are conservative in distribution of quarterly income early in the year to avoid the circumstance of over-distributing income, which would lead to re-characterization of distributions (in part) after the fact as return of capital. (This has happened in the past.)
loukycpa
Posts: 801
Joined: Wed Aug 05, 2020 9:52 am

Re: VTAPX, Short-term TIPS Dividend Variations

Post by loukycpa »

Carsson3 wrote: Wed Apr 03, 2024 9:23 am
Svensk Anga wrote: Tue Apr 02, 2024 9:40 pm TIPS funds distribute the coupon payments they collect from the bonds they hold plus the inflation adjustments to principal, less the fund expenses. The coupons and expenses will be steady, but the inflation adjustments vary widely.
#4. Discount bond appreciation toward par: Monthly variation likely not high.
On this one, I think there is actually a high degree of variation and unknown.

If an investor buys a TIPS today that matures in 3 years and the coupon rate is a lot lower than 2%, then the bond is going to be trading at a discount to par. Then investor would get part of his or her 2% real yield as accretion of that discount over the remaining 3 year term.

But with a fund, you have no idea when the fund purchased the bond. If the fund purchased the bond sometime ago when real yields were negative, perhaps there was no discount. There could have even been a premium.

The point is what the fund passes out for tax purposes has no connection to when the investor buys into the fund. It is based on the fund's taxable income.
"The safe assumption for an investor is that over the next hundred years, the currency is going to zero." - Charlie Munger
Topic Author
Carsson3
Posts: 153
Joined: Tue Nov 08, 2022 4:44 pm

Re: VTAPX, Short-term TIPS Dividend Variations

Post by Carsson3 »

Geologist wrote: Wed Apr 03, 2024 9:39 am There is some historical evidence that TIPS funds (not just Vanguard) are conservative in distribution of quarterly income early in the year to avoid the circumstance of over-distributing income, which would lead to re-characterization of distributions (in part) after the fact as return of capital. (This has happened in the past.)
To my knowledge, all of your posting's points are quite accurate. But it seems to me that only the quoted portion above addresses the issue of huge swings in quarterly dividend levels, and perhaps you would agree. Vanguard is not alone in this issue, as you state. Your quoted point above was also mentioned to me by Vanguard as "return of capital". I need to study this issue area, but whatever the details, perhaps it raises a value issue, as described below:

Return of capital is a negative, but so also is hugely variable dividend levels quarter to quarter, e.g. down 96%.
I am not clear on why return of capital is a large negative, and for whom, the fund or the fund holder?

What is to be said to the fund holder who states:
"I prefer a more regular dividend flow, at least not a 96% reduction quarter over quarter, over finding out at year end that a somewhat modest portion of dividends received were after all return of capital." A good fund management company wants to address its clients' needs and values, where practical. Of course, I don't know how fund holders would 'vote', if asked to choose between (1) modest return of capital with more steady dividend amounts, or (2) no or very little return of capital, with huge variation in quarterly dividends. I would choose (1).
Topic Author
Carsson3
Posts: 153
Joined: Tue Nov 08, 2022 4:44 pm

Re: VTAPX, Short-term TIPS Dividend Variations

Post by Carsson3 »

loukycpa wrote: Wed Apr 03, 2024 9:44 am
Carsson3 wrote: Wed Apr 03, 2024 9:23 am
Svensk Anga wrote: Tue Apr 02, 2024 9:40 pm TIPS funds distribute the coupon payments they collect from the bonds they hold plus the inflation adjustments to principal, less the fund expenses. The coupons and expenses will be steady, but the inflation adjustments vary widely.
#4. Discount bond appreciation toward par: Monthly variation likely not high.
On this one, I think there is actually a high degree of variation and unknown.

If an investor buys a TIPS today that matures in 3 years and the coupon rate is a lot lower than 2%, then the bond is going to be trading at a discount to par. Then investor would get part of his or her 2% real yield as accretion of that discount over the remaining 3 year term.

But with a fund, you have no idea when the fund purchased the bond. If the fund purchased the bond sometime ago when real yields were negative, perhaps there was no discount. There could have even been a premium.

The point is what the fund passes out for tax purposes has no connection to when the investor buys into the fund. It is based on the fund's taxable income.
I grant all your points above as highly relevant to assessing dividend level changes over long periods of time, but I do not see how they collectively explain a quarter to quarter decrease of 96% in dividend amounts. A claimed principal causal factor has to be somewhat proportional to the claimed effect, as well illustrated in the cause of the cars speed being proportional to how far down the accelerator pedal is pushed by my foot. If I push down only slightly on the accelerator pedal and the car's speed quickly increases from 20 to 80, then something else is going on other than the extent of the accelerator push. I do not see how a three month change in bond discount/premium status is adequate in quantity and scope to that which is to be explained, the quarter to quarter change in dividend amounts, i.e. 96%. My personal guess is that fund management throttles back the dividend amount because of reasons that are not commonly put forward, perhaps CYA to avoid return of capital issues, but that is just my current guess.
increment
Posts: 1770
Joined: Tue May 15, 2018 2:20 pm

Re: VTAPX, Short-term TIPS Dividend Variations

Post by increment »

Carsson3 wrote: Wed Apr 03, 2024 11:15 am I am not clear on why return of capital is a large negative, and for whom, the fund or the fund holder?
Well, it is at least a record-keeping headache, since the holder's basis has to be reduced for each return of capital.
FactualFran
Posts: 2824
Joined: Sat Feb 21, 2015 1:29 pm

Re: VTAPX, Short-term TIPS Dividend Variations

Post by FactualFran »

Carsson3 wrote: Wed Apr 03, 2024 11:15 am I am not clear on why return of capital is a large negative, and for whom, the fund or the fund holder?
Return of capital distributions are likely the largest negative to those who own non-covered shares of a fund. Each fund shareholder is responsible for correctly adjusting the basis of shares on which return of capital distributions have been made.

Fund shareholder who use average basis have it easier because they subtract from the capital distribution amount from the cumulative basis of the shares. Fund shareholders who use a cost basis make a separate adjustment for each purchase lot. With covered shares, the brokerage adjusts the basis.
loukycpa
Posts: 801
Joined: Wed Aug 05, 2020 9:52 am

Re: VTAPX, Short-term TIPS Dividend Variations

Post by loukycpa »

Carsson3 wrote: Wed Apr 03, 2024 11:33 am
loukycpa wrote: Wed Apr 03, 2024 9:44 am
Carsson3 wrote: Wed Apr 03, 2024 9:23 am
Svensk Anga wrote: Tue Apr 02, 2024 9:40 pm TIPS funds distribute the coupon payments they collect from the bonds they hold plus the inflation adjustments to principal, less the fund expenses. The coupons and expenses will be steady, but the inflation adjustments vary widely.
#4. Discount bond appreciation toward par: Monthly variation likely not high.
On this one, I think there is actually a high degree of variation and unknown.

If an investor buys a TIPS today that matures in 3 years and the coupon rate is a lot lower than 2%, then the bond is going to be trading at a discount to par. Then investor would get part of his or her 2% real yield as accretion of that discount over the remaining 3 year term.

But with a fund, you have no idea when the fund purchased the bond. If the fund purchased the bond sometime ago when real yields were negative, perhaps there was no discount. There could have even been a premium.

The point is what the fund passes out for tax purposes has no connection to when the investor buys into the fund. It is based on the fund's taxable income.
I grant all your points above as highly relevant to assessing dividend level changes over long periods of time, but I do not see how they collectively explain a quarter to quarter decrease of 96% in dividend amounts. A claimed principal causal factor has to be somewhat proportional to the claimed effect, as well illustrated in the cause of the cars speed being proportional to how far down the accelerator pedal is pushed by my foot. If I push down only slightly on the accelerator pedal and the car's speed quickly increases from 20 to 80, then something else is going on other than the extent of the accelerator push. I do not see how a three month change in bond discount/premium status is adequate in quantity and scope to that which is to be explained, the quarter to quarter change in dividend amounts, i.e. 96%. My personal guess is that fund management throttles back the dividend amount because of reasons that are not commonly put forward, perhaps CYA to avoid return of capital issues, but that is just my current guess.
I think you are on the right track there. I would remember these distribution are all about tax reporting. I imagine there is much more of a focus in the fourth quarter to getting it final for the year, with the first three quarters being a swag being careful not to overshoot.

What is your goal with this? Are you an income focused investor who wants to only spend the income and not touch the principal from a mental accounting standpoint?
"The safe assumption for an investor is that over the next hundred years, the currency is going to zero." - Charlie Munger
Topic Author
Carsson3
Posts: 153
Joined: Tue Nov 08, 2022 4:44 pm

Re: VTAPX, Short-term TIPS Dividend Variations

Post by Carsson3 »

What is your goal with this? Are you an income focused investor who wants to only spend the income and not touch the principal from a mental accounting standpoint?
[/quote]
That is a reasonable question. This started with my tracking on dividends in 2024 more than had during the ZIRP years. So at the end of 1Q 2024 I looked at dividends in several funds with the goal of very roughly annualizing them, as a personal planning tool. This goal of very roughly annualizing dividends based on the 1Q actual dividend obviously does not work with the TIPS funds. I then realized I had an insufficient and incomplete idea of how TIPS dividends are determined, compared to nominal bond funds' dividends.

Fidelity's one TIPS fund has in its prospectus a monthly dividend, but in recent years to my knowledge only the December payment is substantive, with the other eleven monthly dividend payments being at zero or negligible dollars. I have a cognitive need to understand how and why TIPS funds vary so much in dividend payment levels in just a one year span, and why there is the 4Q bump and sometimes 1Q swoon.

Fund managements don't seem to want to communicate very much or very directly on this point of TIPS funds dividend variation, which always prompts more interest in the point by me at least. It's all perfectly legal and per prospectus, no doubt, but perhaps intentionally not well communicated by fund management. I can write the fund management and hope for a reply, but it is not clear to me why I can't get the answer in an easier and quicker way.

I am at the point of accepting for now the explanation of avoiding of return of capital, without well understanding it yet. I stand by the point that fund management may be going too far in that direction, verses having more regular-sized quarterly dividends with some return of capital overshoot not being a very big deal. Somewhat predictable dividends, given market constraints of course, have a client convenience factor, which is being ignored, I argue.
FactualFran
Posts: 2824
Joined: Sat Feb 21, 2015 1:29 pm

Re: VTAPX, Short-term TIPS Dividend Variations

Post by FactualFran »

Carsson3 wrote: Wed Apr 03, 2024 12:52 pm I am at the point of accepting for now the explanation of avoiding of return of capital, without well understanding it yet. I stand by the point that fund management may be going too far in that direction, verses having more regular-sized quarterly dividends with some return of capital overshoot not being a very big deal. Somewhat predictable dividends, given market constraints of course, have a client convenience factor, which is being ignored, I argue.
Whether there is a return of capital distribution is a big deal for some fund shareholders. A return of capital distribution can make it necessary for fund shareholders to adjust the basis of their shares. The same calculations are done regardless of the size of the return of capital distribution. Not having a return of capital distribution eliminates having to do the calculations.

Those who want regular-sized quarterly dividend amounts should avoid TIPS funds.
Topic Author
Carsson3
Posts: 153
Joined: Tue Nov 08, 2022 4:44 pm

Re: VTAPX, Short-term TIPS Dividend Variations

Post by Carsson3 »

I had been lacking information on the downside of the return of capital, and you have supplied one downside, and likely the only or main one. I take your point to be that, yes, the avoidance of return of capital is the primary reason for the huge variations in quarterly dividend amounts for VTAPX and similar funds.

Historically, the Fidelity TIPS fund has made in recent years just about all its payouts in December only. So by having some quarterly payouts at all, VTAPX is taking a small actual risk of return of capital.

On the other hand, there is likely a large, or at least significant, percentage of actual or potential bond fund holders who want to be in TIPS with a part of their portfolio, but also want to have some reasonable degree of regularity of cash income from that investment, and fund managers must know this.

I still wonder if fund management might be leaning too far toward self-protection, and not far enough toward possible client preferences. I do not know that for fact, but that seems plausible.
loukycpa
Posts: 801
Joined: Wed Aug 05, 2020 9:52 am

Re: VTAPX, Short-term TIPS Dividend Variations

Post by loukycpa »

Carsson3 wrote: Wed Apr 03, 2024 3:27 pm
On the other hand, there is likely a large, or at least significant, percentage of actual or potential bond fund holders who want to be in TIPS with a part of their portfolio, but also want to have some reasonable degree of regularity of cash income from that investment, and fund managers must know this.

I still wonder if fund management might be leaning too far toward self-protection, and not far enough toward possible client preferences. I do not know that for fact, but that seems plausible.
Distributions from mutual funds and ETFs are about tax reporting. They are not about providing income to the owners of the funds. If it wasn't required for tax purposes, I suspect Vanguard and many other brokerage firms wouldn't pay them at all. Avoid the administrative costs and pass along the savings to their clients.
"The safe assumption for an investor is that over the next hundred years, the currency is going to zero." - Charlie Munger
Geologist
Posts: 3120
Joined: Fri Jan 02, 2009 6:35 pm

Re: VTAPX, Short-term TIPS Dividend Variations

Post by Geologist »

Distribution of substantially all net income to shareholders is not simply about tax reporting for the shareholders. This action also allows funds to be exempt from corporate income taxes (and an excise tax for the fund on undistributed net income above certain limits). (These laws apply even if all the shareholders are in tax-advantaged accounts, as is true for some share classes.) Since these tax laws have existed for many decades, I think there is no reason to speculate on what Vanguard or other managers would do in the absence of such laws.

Investment company managers have to balance all kinds of considerations in how they make distributions. Some funds do so just at the end of the year, some more often.

The OP is making assumptions about “possible [shareholder] preferences”. I don’t know how the OP could really know what they are. I can certainly say, as a holder of Vanguard’s Intermediate TIPS fund, that there was considerable negative comment when the return of capital occurred (this would argue against blindly trying to make all distributions equal). The OP has recognized that Fidelity dealt with the issue by basically discontinuing distributions during the year despite the prospectus’s statement that distributions will be monthly. In the end, how management makes distributions is at their discretion as long as they get essentially all the net income distributed by year end. Income to a TIPS fund is volatile. Shareholders in TIPS funds just need to accept how their fund does it (and Vanguard's fund has a pattern).
loukycpa
Posts: 801
Joined: Wed Aug 05, 2020 9:52 am

Re: VTAPX, Short-term TIPS Dividend Variations

Post by loukycpa »

Geologist wrote: Thu Apr 04, 2024 7:15 am Distribution of substantially all net income to shareholders is not simply about tax reporting for the shareholders. This action also allows funds to be exempt from corporate income taxes (and an excise tax for the fund on undistributed net income above certain limits). (These laws apply even if all the shareholders are in tax-advantaged accounts, as is true for some share classes.) Since these tax laws have existed for many decades, I think there is no reason to speculate on what Vanguard or other managers would do in the absence of such laws.
Of course, agreed. I should have been clearer and more precise. My point was that it isn't about providing an income stream to owners of the funds. It's being done for tax purposes. Avoid double taxation by distributing/passing out taxable income to the owners of the fund.
"The safe assumption for an investor is that over the next hundred years, the currency is going to zero." - Charlie Munger
dbr
Posts: 46292
Joined: Sun Mar 04, 2007 8:50 am

Re: VTAPX, Short-term TIPS Dividend Variations

Post by dbr »

Carsson3 wrote: Wed Apr 03, 2024 9:23 am
#1. Coupon payments received by the fund: Monthly variation likely not high.
#2. Inflation adjustments to principal: Monthly variation can be high.
#3. Fund expenses: Monthly variation likely not high, but accounting timing is unknown.
#4. Discount bond appreciation toward par: Monthly variation likely not high.
For your holding in a TIPS fund to track inflation on the principal value you have to reinvest any distributions related to inflation increments. If you own a single TIPS that is automatically taken care of as only the coupon interest is paid out. Funds also pay out the inflation increments so that fund holders will be properly taxed on them. Capita gains and losses related to premium/discount purchasing cloud the picture even further.

If your idea was to hold a TIPS fund to cash in a steady dividend of nominal dollars from the mechanism of inflation indexing then you bought the wrong investment. What you can do if it still needs to be TIPS is take the dividend and then sell some shares if the dividend is not enough or reinvest some of the dividend when it is too much.
Topic Author
Carsson3
Posts: 153
Joined: Tue Nov 08, 2022 4:44 pm

Re: VTAPX, Short-term TIPS Dividend Variations

Post by Carsson3 »

loukycpa wrote: Thu Apr 04, 2024 6:31 am Distributions from mutual funds and ETFs are about tax reporting. They are not about providing income to the owners of the funds. If it wasn't required for tax purposes, I suspect Vanguard and many other brokerage firms wouldn't pay them at all. Avoid the administrative costs and pass along the savings to their clients.
[ quote fixed by admin LadyGeek]

Perhaps you are talking about primarily or exclusively stock mutual funds and ETFs, whereas I was and am addressing bond mutual funds, which VTAPX is of course. A great many investors choose bond mutual funds for income, rather than for trading and market timing. In fact, a long time Vanguard bond desk person once stated to me on the phone that bond mutual funds are primarily income vehicles, which is a commonplace point.
If you are trading oriented, and stock oriented, fine. But there are many other types of investors and perspectives.
Topic Author
Carsson3
Posts: 153
Joined: Tue Nov 08, 2022 4:44 pm

Re: VTAPX, Short-term TIPS Dividend Variations

Post by Carsson3 »

Reply to dbr as quoted below. My error in mishandling quote feature. [ quote fixed by admin LadyGeek]
dbr wrote: Thu Apr 04, 2024 8:06 am For your holding in a TIPS fund to track inflation on the principal value you have to reinvest any distributions related to inflation increments. If you own a single TIPS that is automatically taken care of as only the coupon interest is paid out. Funds also pay out the inflation increments so that fund holders will be properly taxed on them. Capita gains and losses related to premium/discount purchasing cloud the picture even further.

If your idea was to hold a TIPS fund to cash in a steady dividend of nominal dollars from the mechanism of inflation indexing then you bought the wrong investment. What you can do if it still needs to be TIPS is take the dividend and then sell some shares if the dividend is not enough or reinvest some of the dividend when it is too much.
Your first paragraph above is 100% correct as to facts. However, I do not think that it goes very far to support your second paragraph, which is your inferred conclusion.

The main reason to buy TIPS, funds or otherwise, is having an investment outlook that posits a substantial future period of significantly lower, perhaps even negative real returns for nominal Treasuries of comparable maturities. The more an investor believes in this outlook, the more important TIPS are in the corresponding portfolio.

You state, as quoted above: "If your idea was to hold a TIPS fund to cash in a steady dividend of nominal dollars from the mechanism of inflation indexing then you bought the wrong investment." That is in away an example of 'all or nothing thinking'. Yes, taking out income from TIPS cash flows will make the investor fall short of fully keeping up with inflation, but being at 100% with inflation is not the practical point. The practical point is to come out better with TIPS than with corresponding nominal Treasuries, provided of course the background assumption that the investor wants the top credit level.

If the future real yield on nominal Treasuries is -2%, and my TIPS pay a real yield of 2%, then I am 4% ahead in TIPS as to income, and I can spend half (or some substantial portion of) that income, and still be better off than in nominal Treasuries, despite falling short of fully keeping up with inflation.
oxothuk
Posts: 894
Joined: Thu Nov 10, 2011 7:35 pm

Re: VTAPX, Short-term TIPS Dividend Variations

Post by oxothuk »

Carsson3 wrote: Wed Apr 03, 2024 9:23 am #1. Coupon payments received by the fund: Monthly variation likely not high.
There may be more variation in this than you think. Most TIPS coupon payments will come during Q1 (Jan,Feb) and Q3 (Jul, Aug). There are only a few TIPS which pay coupons in Q2 (Apr) and Q4 (Oct).
Topic Author
Carsson3
Posts: 153
Joined: Tue Nov 08, 2022 4:44 pm

Re: VTAPX, Short-term TIPS Dividend Variations

Post by Carsson3 »

oxothuk wrote: Thu Apr 04, 2024 10:53 am
Carsson3 wrote: Wed Apr 03, 2024 9:23 am #1. Coupon payments received by the fund: Monthly variation likely not high.
There may be more variation in this than you think. Most TIPS coupon payments will come during Q1 (Jan,Feb) and Q3 (Jul, Aug). There are only a few TIPS which pay coupons in Q2 (Apr) and Q4 (Oct).
Very interesting!
I had not compared various TIPS funds beyond only two giant fund companies, and I was lazily assuming that all TIPS funds had more more commonality than they apparently do. There is likely no way become aware of and compare alternative TIPS fund management strategies, since none of the actors wins by being explicit about her reasoning.
With TIPS, I now know enough to know that I will be permanently confused.
User avatar
Svensk Anga
Posts: 1647
Joined: Sun Dec 23, 2012 4:16 pm

Re: VTAPX, Short-term TIPS Dividend Variations

Post by Svensk Anga »

I think you are not appreciating how variable inflation is month to month (and seasonally). For the last year+, the changes in non-seasonally adjusted CPI-U were:

January 2023, 0.80%
February 0.56%
March 0.33%
April 0.51%
May 0.25%
June 0.32%
July 0.19%
August 0.44%
September 0.25%
October -0.04%
November -0.20%
December -0.10%
January 2024 0.54%
February 0.62%

Notice that October-December were all negative and 1st quarter readings are higher than most. This is the typical pattern. The seasonal variation is why the government reports seasonally adjusted values. People would react badly if they just annualized that 0.80% in January 2023 for instance.

The October inflation was reported mid-November and was used to adjust TIPS values in December. The deflation in November and December reduced TIPS values in the first quarter. The fund dug itself a hole and does not have to distribute inflation adjustments until it exceeds the end September CPI value (I think). That is why distributions tanked in the 1st quarter.

Coupon payments on a lot of these TIPS are tiny, some at the minimum of 0.125%/year. That does not make for a generous distribution yield. Distribution yield amounts are dominated by the month to month variation in CPI.
loukycpa
Posts: 801
Joined: Wed Aug 05, 2020 9:52 am

Re: VTAPX, Short-term TIPS Dividend Variations

Post by loukycpa »

If you were holding the bonds held by this fund, you wouldn't be receiving any portion of the inflation adjustment as cash flow to you each year. No cash flow on that until maturity.

Similarly, many of the bonds held by the fund are currently trading at a discount to par because of the low coupon rate versus the 2% coupon rate. If you were holding these bonds yourself directly, you wouldn't see that cash flow either until maturity.

There is no reason to expect anything different when you own through a fund.
"The safe assumption for an investor is that over the next hundred years, the currency is going to zero." - Charlie Munger
dbr
Posts: 46292
Joined: Sun Mar 04, 2007 8:50 am

Re: VTAPX, Short-term TIPS Dividend Variations

Post by dbr »

Delete
Last edited by dbr on Thu Apr 04, 2024 10:10 pm, edited 1 time in total.
Geologist
Posts: 3120
Joined: Fri Jan 02, 2009 6:35 pm

Re: VTAPX, Short-term TIPS Dividend Variations

Post by Geologist »

oxothuk wrote: Thu Apr 04, 2024 10:53 am
Carsson3 wrote: Wed Apr 03, 2024 9:23 am #1. Coupon payments received by the fund: Monthly variation likely not high.
There may be more variation in this than you think. Most TIPS coupon payments will come during Q1 (Jan,Feb) and Q3 (Jul, Aug). There are only a few TIPS which pay coupons in Q2 (Apr) and Q4 (Oct).
This fund’s income is not coupon payments, exactly. The fund accrues the interest from its debt securities every day, so its distributions are not dependent on timing of coupons. Thus it is crediting interest each day, not just when coupon payments arrive. (I quoted the accounting information from the annual report in an earlier post in this thread. This is identical to what basically every bond fund I know about does.)
Geologist
Posts: 3120
Joined: Fri Jan 02, 2009 6:35 pm

Re: VTAPX, Short-term TIPS Dividend Variations

Post by Geologist »

Carsson3 wrote: Thu Apr 04, 2024 12:28 pm
oxothuk wrote: Thu Apr 04, 2024 10:53 am
Carsson3 wrote: Wed Apr 03, 2024 9:23 am #1. Coupon payments received by the fund: Monthly variation likely not high.
There may be more variation in this than you think. Most TIPS coupon payments will come during Q1 (Jan,Feb) and Q3 (Jul, Aug). There are only a few TIPS which pay coupons in Q2 (Apr) and Q4 (Oct).
Very interesting!
I had not compared various TIPS funds beyond only two giant fund companies, and I was lazily assuming that all TIPS funds had more more commonality than they apparently do. There is likely no way become aware of and compare alternative TIPS fund management strategies, since none of the actors wins by being explicit about her reasoning.
With TIPS, I now know enough to know that I will be permanently confused.
As I have responded separately to oxothuk, distributions in TIPS funds (and bond funds generally) are not based on coupon payments. Bond funds use accrual accounting and accrue interest daily (that is, they calculate the interest accrued each day and count that as income). They then pay out at a distribution date all the accrued interest for a TIPS note/bond even if the coupon payment won't be paid for some time.

I quoted the relevant section of the annual report earlier in the thread.
Topic Author
Carsson3
Posts: 153
Joined: Tue Nov 08, 2022 4:44 pm

Re: VTAPX, Short-term TIPS Dividend Variations

Post by Carsson3 »

Svensk Anga wrote: Thu Apr 04, 2024 2:47 pm Coupon payments on a lot of these TIPS are tiny, some at the minimum of 0.125%/year. That does not make for a generous distribution yield. Distribution yield amounts are dominated by the month to month variation in CPI.
You have provided some excellent data and valid points. I now wonder if my problem may be some confused concepts involving TIPS. Possibly.

You show a fair amount of month over month late 2023 deflation in the red numbers you post. So down goes the adjusted capital value, instead of up. Since, uniquely, capital reductions with TIPS effectively 'consume' current interest income received by the fund from its holdings, a period of deflation could produce some negligible quarterly dividend payouts, or even zero dollars.

[BTW, I do reinvest TIPS fund dividends, rather than spend them, so my needs here are cognitive: How does this damn thing actually work?]

What I was perhaps erroneously projecting is best illustrated by a made up example that is not too far from my actual case.

Let's say I bought into my TIPS fund when the prevailing real yields on TIPS of its average maturity per a Fed bank site was roughly 2%, and prevailing inflation was in the 4% area. From this, I projected, correctly or not, that a fall in the inflation rate down to zero percent, so no deflation, would still mean my receiving a fairly steady 2% return for my investment. There are many other factors, but simplification here is key.

Where and how did I go wrong here? Or, was I broadly correct in my reasoning, and these massive quarterly dividend crashes are substantially attributable to fund management planning for the entire year, effectively pushing the lion's share of dividend payouts into 4Q for VTAPX, to protect from return of capital or whatever?

I suppose what is called for regarding these competing causal claims is looking at several TIPS funds over 3-5 years to see to what extent the 4th quarter dividends are massive compared to dividends in earlier quarters, and also looking at monthly CPI changes over the same longer period. There may be correlations strongly supporting the 'inflation monthly variation' hypothesis, or alternatively supporting the 'fund management strategy' hypothesis. Damaging to 'your case' (?) would be heavy December dividends paired with falling inflation for the preceding August, September, and October. Damaging to 'my case' would be one or more comparatively heavy dividend quarters following on on heavy recent inflation rate increases. Hope I have that straight. Very empirical, if the key concepts are applied accurately.
Topic Author
Carsson3
Posts: 153
Joined: Tue Nov 08, 2022 4:44 pm

Re: VTAPX, Short-term TIPS Dividend Variations

Post by Carsson3 »

Svensk Anga wrote: Thu Apr 04, 2024 2:47 pm I think you are not appreciating how variable inflation is month to month (and seasonally). For the last year+, the changes in non-seasonally adjusted CPI-U were:

January 2023, 0.80%
February 0.56%
March 0.33%
April 0.51%
May 0.25%
June 0.32%
July 0.19%
August 0.44%
September 0.25%
October -0.04%
November -0.20%
December -0.10%
January 2024 0.54%
February 0.62%

Notice that October-December were all negative and 1st quarter readings are higher than most. This is the typical pattern. The seasonal variation is why the government reports seasonally adjusted values. People would react badly if they just annualized that 0.80% in January 2023 for instance.

The October inflation was reported mid-November and was used to adjust TIPS values in December. The deflation in November and December reduced TIPS values in the first quarter. The fund dug itself a hole and does not have to distribute inflation adjustments until it exceeds the end September CPI value (I think). That is why distributions tanked in the 1st quarter.

Coupon payments on a lot of these TIPS are tiny, some at the minimum of 0.125%/year. That does not make for a generous distribution yield. Distribution yield amounts are dominated by the month to month variation in CPI.
Below is a small pasted spreadsheet comparing dividends in three substantial US mutual funds in short-term TIPS. The dividend amount is material for present purposes only in terms of its variability. A measure that I think works well enough and is easy to use is to ask how far the lowest dividend payment of the year is from the highest payment, for each fund.
I will make some specific comments below the spreadsheet, but my overall point is to substantiate my claim that more is going on with VTAPX than inflation-related intra-year dividend rate management. The lines below do not paste, and the columns slide out of line when I go from Preview to Submit--can't figure out how to prevent that, sorry.

Eaton Vance Amt. iShares Amt. Vgd Amt.
31-Mar-24 $ 0.06 27-Mar-24 $ 0.07 1-Apr-24 $ 0.01
29-Feb-24 $ -
31-Jan-24 $ 0.00
31-Dec-23 $ 0.01 28-Dec-23 $ 0.13 22-Dec-23 $ 0.32
30-Nov-23 $ 0.04
31-Oct-23 $ 0.05
30-Sep-23 $ 0.03 28-Sep-23 $ 0.11 2-Oct-23 $ 0.17
31-Aug-23 $ 0.04
31-Jul-23 $ 0.03
30-Jun-23 $ 0.05 29-Jun-23 $ 0.14 3-Jul-23 $ 0.17
31-May-23 $ 0.03
30-Apr-23 $ 0.05
31-Mar-23 $ 0.02 30-Mar-23 $ 0.06 3-Apr-23 $ 0.01
28-Feb-23 $ -
31-Jan-23 $ 0.00
31-Dec-22 $ 0.01 29-Dec-22 $ 0.07 23-Dec-22 $ 0.56

The Eaton-Vance fund has monthly payouts. These likely track fairly well on inflation changes. Quarterly dividends are in effect smoothings of monthly dividends, so quarterly funds track inflation less well, which is worth noting but pretty obvious.
Of more interest for my purposes is comparing Ishares and Vgd. The lowest ishares dividend level is a little under 50% of the highest ishares quarterly dividend level, so a maximum intra-year variation of a little over 50%. But for the Vanguard fund the lowest quarterly dividend is more like 3% of the highest quarterly dividend level.
It is a fair guess that ishares is mostly tracking inflation in determining its dividend levels. But my point in this post, which I have (at last) well documented, is that a lot more than inflation tracking is going on the the Vanguard fund in this area. What is the management strategy for throttling down the dividend so drastically, or is something else causing this?
I may ask fund management at Vanguard by paper mail, but it would be helpful to know first, for letter wording, what the plausible answers might be. My hypothesis is that Vanguard fund management is being excessive in insuring against return of capital. But that is only one guess. I wish fund management generally would be more informative and direct on points such as these.
Are there any other good hypotheses for this hyper variation in this Vanguard fund's dividend levels, tanking much more than competing funds every first quarter, as it appears?
sycamore
Posts: 6464
Joined: Tue May 08, 2018 12:06 pm

Re: VTAPX, Short-term TIPS Dividend Variations

Post by sycamore »

Carsson3 wrote: Sat Apr 06, 2024 6:39 am The lines below do not paste, and the columns slide out of line when I go from Preview to Submit--can't figure out how to prevent that, sorry.
The simplest thing to do is use a "code" block when you write your post. This results in a monospace font, not proportional.

Code: Select all

Eaton Vance	Amt.	    iShares	    Amt.	       Vgd	      Amt.
31-Mar-24	 $     0.06 	27-Mar-24	 $ 0.07 	1-Apr-24	 $   0.01 
29-Feb-24	 $         -   	 	 	 	 
31-Jan-24	 $     0.00 	 	 	 	 
31-Dec-23	 $     0.01 	28-Dec-23	 $ 0.13 	22-Dec-23	 $   0.32 
30-Nov-23	 $     0.04 	 	 	 	 
31-Oct-23	 $     0.05 	 	 	 	 
30-Sep-23	 $     0.03 	28-Sep-23	 $ 0.11 	2-Oct-23	 $   0.17 
31-Aug-23	 $     0.04 	 	 	 	 
31-Jul-23	 $     0.03 	 	 	 	 
30-Jun-23	 $     0.05 	29-Jun-23	 $ 0.14 	3-Jul-23	 $   0.17 
31-May-23	 $     0.03 	 	 	 	 
30-Apr-23	 $     0.05 	 	 	 	 
31-Mar-23	 $     0.02 	30-Mar-23	 $ 0.06 	3-Apr-23	 $   0.01 
28-Feb-23	 $         -   	 	 	 	 
31-Jan-23	 $     0.00 	 	 	 	 
31-Dec-22	 $     0.01 	29-Dec-22	 $ 0.07 	23-Dec-22	 $   0.56 
How does one use a code block? When you start a post, notice a control panel at the top. It looks like:

Image


Click on the Code button to create a code block. Copy and paste the contents in between the start and end code tags.

For more info see How do I create a table in my forum post?
Topic Author
Carsson3
Posts: 153
Joined: Tue Nov 08, 2022 4:44 pm

Re: VTAPX, Short-term TIPS Dividend Variations

Post by Carsson3 »

Thanks for the info and especially for fixing it.
Post Reply