Difference between short-term TIPS funds?

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joeschmo
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Difference between short-term TIPS funds?

Post by joeschmo » Tue Feb 11, 2020 11:59 pm

Hi, I'm trying to pick a short-term TIPS fund for half of my fixed-income allocation (to complement VWIUX Vanguard Interm-Term Munis) and am looking at these:

STIP iShares 0-5 Year TIPS ETF / 0.06% ER
VTIP Vanguard Short-Term TIPS ETF / 0.05% ER

They seem like equivalent funds but iShares seems to be underperforming the index quite a bit. I was hoping to go with iShares since I already have a lot of Vanguard funds. Are these differences meaningful or due to something about how things are being calculated?

I noticed that places like Wealthfront use the total TIPS funds like SCHP Schwab, TIP iShares, and IPE SPDR, which are much more expensive.

Thanks!
Last edited by joeschmo on Wed Feb 12, 2020 12:38 am, edited 1 time in total.

Northern Flicker
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Re: Difference between short-term TIPS funds?

Post by Northern Flicker » Wed Feb 12, 2020 12:17 am

I believe they track different indices, which means there will be small deviations in performance between the two. The ER of STIP is .06% btw, not 0.6%.

I prefer VTIP but either one is fine. SCHP has an ER of .05% as well so comparing it to VTIP the question is what duration is consistent with your objectives? The duration of SCHP appears to be 7.4 years, vs 2.4 years for VTIP.
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joeschmo
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Re: Difference between short-term TIPS funds?

Post by joeschmo » Wed Feb 12, 2020 12:46 am

Thanks for the reply and good catch re the ERs! It seems that VTIP has consistently outperformed STIP:

Image

red = VTIP. Of course, past performance is just the past. Which index is the theoretically "better" one to track?

Basically if I don't go with STIP, I'm not sure how I'm going to get my non-Vanguard funds into my portfolio, since the Vanguard ones always seem to be a tad better or a tad cheaper or both...! Perhaps I will just gradually work my way into IXUS iShares Ex-US and ITOT iShares Total Stock Market?

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FIREchief
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Re: Difference between short-term TIPS funds?

Post by FIREchief » Wed Feb 12, 2020 12:38 pm

joeschmo wrote:
Tue Feb 11, 2020 11:59 pm
I was hoping to go with iShares since I already have a lot of Vanguard funds.
This makes it sound like you would not want 100% VG funds in your portfolio. Why is that?
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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joeschmo
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Re: Difference between short-term TIPS funds?

Post by joeschmo » Wed Feb 12, 2020 12:54 pm

Paranoia? I can all too easily imagine the news articles someday describing people who lost their entire retirement savings because everyone said it was impossible for Vanguard to fail. Just reminds me a bit of the Titanic....sorry to be irrational...

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Re: Difference between short-term TIPS funds?

Post by #Cruncher » Wed Feb 12, 2020 1:51 pm

joeschmo wrote:
Tue Feb 11, 2020 11:59 pm
... iShares seems to be underperforming the index quite a bit.
How do you conclude this, joeschmo? According to their websites both ETFs have grown about the same as the index over the five years ending 1/31/2020:
1.66% : STIP
1.65% : VTIP
1.71% : 0-5 Year TIPS Index


However, VTIP's holdings track the index much closer. Here is the percentage weighting of TIPS held in each fund as of 12/31/2019 compared against the index weighting of all TIPS maturing in 0 to 5 years. (From the Weight sheet of my Yield to Maturity and Duration Calculator spreadsheet updated as of 12/31/2019.) Note that VTIP (in orange) almost matches the index (in blue), but several issues held by STIP (in gray) do not.

Image

Most notably 17% of STIP's holdings are in the 4/15/2023 maturity compared to only 7% for the index and VTIP. STIP even omits the three issues maturing April, July, and October 2024; and instead holds about 4% each in two issues that mature in July of 2025 and 2026 (i.e., after five years).

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joeschmo
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Re: Difference between short-term TIPS funds?

Post by joeschmo » Wed Feb 12, 2020 3:02 pm

#Cruncher wrote:
Wed Feb 12, 2020 1:51 pm
joeschmo wrote:
Tue Feb 11, 2020 11:59 pm
... iShares seems to be underperforming the index quite a bit.
How do you conclude this, joeschmo? According to their websites both ETFs have grown about the same as the index over the five years ending 1/31/2020:
1.66% : STIP
1.65% : VTIP
1.71% : 0-5 Year TIPS Index
Thanks for thinking about this with me! I was looking at data from Google over the maximum time span available, about 6-7 years I think:

posting.php?mode=quote&f=10&p=5017126#pr5016033
#Cruncher wrote:
Wed Feb 12, 2020 1:51 pm
However, VTIP's holdings track the index much closer. Here is the percentage weighting of TIPS held in each fund as of 12/31/2019 compared against the index weighting of all TIPS maturing in 0 to 5 years. (From the Weight sheet of my Yield to Maturity and Duration Calculator spreadsheet updated as of 12/31/2019.) Note that VTIP (in orange) almost matches the index (in blue), but several issues held by STIP (in gray) do not.

Image

Most notably 17% of STIP's holdings are in the 4/15/2023 maturity compared to only 7% for the index and VTIP. STIP even omits the three issues maturing April, July, and October 2024; and instead holds about 4% each in two issues that mature in July of 2025 and 2026 (i.e., after five years).
This seems to happen so often with index funds that XYZ non-Vanguard fund will be a touch cheaper but not track the index nearly as well. It seems like in this case it would be imprudent to buy STIP. Perhaps to satisfy my (irrational?) desire for non-Vanguard funds I should instead look to iShares funds for total stock market US and ex-US?

Thanks again for looking at all this - very good call to plot the maturities.

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Re: Difference between short-term TIPS funds?

Post by Northern Flicker » Wed Feb 12, 2020 3:45 pm

I previously indicated that they track different indices, which I believed based on the durations of the portfolios being 2.67 and 2.4 for STIP and VTIP respectively. #Cruncher pointed out that they track the same index. I don’t know why the durations of the portfolios do not match each other. Perhaps that is an artifact of what bonds are available on the secondary market and not being able to just buy what perfectly establishes the correct duration when needed.

The OP was using a google price chart. This is not a reliable way to check performance. A total return chart is appropriate— it will show the growth of $10,000 with interest and dividends instead of just price movement without that. Since inception of VTIP, it has over 7+ years had a small advantage of about 58 basis points in total over the period. I think this may just reflect the fact that STIP had a higher ER when it was introduced.

http://quotes.morningstar.com/chart/fun ... 2%3A955%7D

Not sure the concern with an all-Vanguard portfolio. Each Vanguard fund is a separate entity— its own registered corporation. The assets do not live on Vanguard’s balance sheet like deposits at an uninsured bank. And the actual assets are held by a 3rd party custodian. If Vanguard disappeared, the fund would not, and fund shareholders would have to get together and either liquidate the fund or hire a new administrator for it.
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joeschmo
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Re: Difference between short-term TIPS funds?

Post by joeschmo » Thu Feb 13, 2020 2:00 am

Thanks so much for setting me straight on that - your Morningstar chart link really helped.

Now that I have the right data, it's hard to understand why someone would go with short-term TIPS...in theory I want the inflation protection, since I may be investing over a 70-year time horizon. Am I missing something or would nominal treasuries have been better to own in the past decade? Why did short-term TIPS have zero nominal return between 2012 and mid-2015?

Image

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Re: Difference between short-term TIPS funds?

Post by Doc » Thu Feb 13, 2020 4:48 pm

joeschmo wrote:
Thu Feb 13, 2020 2:00 am
Thanks so much for setting me straight on that - your Morningstar chart link really helped.
Another way to look at it is to use the same link but make it a rolling return chart.
Image

This is a thirty day rolling return. You cannot see any difference. Changing the rolling return period to to longer periods does not change the result.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

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Re: Difference between short-term TIPS funds?

Post by Northern Flicker » Thu Feb 13, 2020 4:58 pm

What are your objectives? What is your ratio of stocks to bonds? Investors with a 70-year horizon usually have high stock allocations and usually prefer nominal bonds to TIPS. If a young retirement saver, their income will (hopefully) outpace (or at least match) inflation. The future benefit of their social security contributions is inflation-adjusted. Medicare essentially is inflation-adjusted as benefit levels are based on the services not their cost (premiums do rise however). Vanguard introduces TIPS into their target retirement portfolios as savers approach their target retirement year.
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joeschmo
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Re: Difference between short-term TIPS funds?

Post by joeschmo » Thu Feb 13, 2020 10:21 pm

Thanks Northern! My detailed story is here. The short story is that I'm 50/50 equities/bonds-and-cash, living off the portfolio and using it for charitable donations. Of the non-cash bonds portion, I'm half TIPS and half munis. The objective for the TIPS portion is to meet or beat zero real return.

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joeschmo
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Re: Difference between short-term TIPS funds?

Post by joeschmo » Fri Feb 14, 2020 1:57 pm

Just wanted to bump this - does anyone smarter than I understand why short-term TIPS performed so badly in the time period above?

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joeschmo
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Re: Difference between short-term TIPS funds?

Post by joeschmo » Fri Feb 14, 2020 3:29 pm

To be specific, I was wanting to go with TIPS for inflation protection, but it seems like short-term nominal treasuries have actually been more stable in the past decade? What am I missing?

Image

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Re: Difference between short-term TIPS funds?

Post by sycamore » Fri Feb 14, 2020 3:29 pm

I don't know if I'm smarter than you but here's one explanation for the drop in 2013:
Finally, it deserves mention that TIPS sometimes behave as if they were risk assets, and sometimes as if they were nominal Treasuries on steroids. We’ve seen two major episodes that illustrate the point well: The 2008-09 financial crisis, and the Taper Tantrum of 2013. When U.S. equities plummeted by more than 25% and market liquidity evaporated in September and October 2008, TIPS dropped by 12%—even as nominal Treasuries eked out a small gain. In fact, TIPS lost almost exactly the same amount as investment-grade corporates over that period.
From https://www.morningstar.com/articles/80 ... -delivered.

And a definition of Taper Tantrum.

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Re: Difference between short-term TIPS funds?

Post by Northern Flicker » Fri Feb 14, 2020 4:07 pm

joeschmo wrote:
Fri Feb 14, 2020 1:57 pm
Just wanted to bump this - does anyone smarter than I understand why short-term TIPS performed so badly in the time period above?
I’m not seeing the bad performance. There are periods when nominal bonds outperform TIPS and periods when TIPS outperform nominal bonds. If that were not true, there would not be a diversification benefit.
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Re: Difference between short-term TIPS funds?

Post by Northern Flicker » Fri Feb 14, 2020 4:31 pm

joeschmo wrote:
Thu Feb 13, 2020 10:21 pm
Thanks Northern! My detailed story is here. The short story is that I'm 50/50 equities/bonds-and-cash, living off the portfolio and using it for charitable donations. Of the non-cash bonds portion, I'm half TIPS and half munis. The objective for the TIPS portion is to meet or beat zero real return.
TIPS real yields are negative at present, out past the 10-year point on the yield curve:

https://www.treasury.gov/resource-cente ... =realyield

The expected real return of a TIPS with a negative real yield is negative. Unfortunately, a nominal treasury of the same duration will have the same expected real return, as gaps will be arbitraged away.
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Re: Difference between short-term TIPS funds?

Post by Doc » Fri Feb 14, 2020 5:28 pm

Northern Flicker wrote:
Fri Feb 14, 2020 4:31 pm
The expected real return of a TIPS with a negative real yield is negative. Unfortunately, a nominal treasury of the same duration will have the same expected real return, as gaps will be arbitraged away.
Nit pick: Not quite. The TIPS have an "insurance premium" to protect the holder from unexpected higher inflation in the future that is built into the return so the return of TIPS will be slightly lower than the real return of the nominals.

One can estimate the insurance premium by subtracting the current inflation rate from the nominal and comparing that number to the TIPS yield.
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Re: Difference between short-term TIPS funds?

Post by Northern Flicker » Fri Feb 14, 2020 7:30 pm

Agreed. Also TIPS may have a liquidity risk premium. What I meant to say was that reverting to nominal treasuries is unlikely to turn expected real return positive when real yields are negative. Inflation risk premiums are close to zero presently. Nominal yields are below TIPS breakeven inflation rates at points on the yield curve where TIPS real yields are negative.
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joeschmo
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Re: Difference between short-term TIPS funds?

Post by joeschmo » Fri Feb 14, 2020 9:18 pm

Thanks for the clarifications! Wow, TIPS get complicated so fast.

[*] It does seem prudent to have some protection against unexpected inflation.
[*] For the non-TIPS bonds, munis make the most sense for my tax bracket.
[*] 50/50 TIPS/munis split means overall I'm ~15% TIPS and ~15% munis.
[*] Swedroe, Ferri et al suggest short-term TIPS. I don't quite understand how inflation in the 0-5yr timeline could be unexpected but especially given that I have lots of VWIUX Interm Term Munis, seems reasonable to go with short-term TIPS / interm-term munis.

Does any of that seem misguided to anyone?

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Re: Difference between short-term TIPS funds?

Post by Phineas J. Whoopee » Fri Feb 14, 2020 9:44 pm

joeschmo wrote:
Fri Feb 14, 2020 9:18 pm
Thanks for the clarifications! Wow, TIPS get complicated so fast.

[*] It does seem prudent to have some protection against unexpected inflation.
[*] For the non-TIPS bonds, munis make the most sense for my tax bracket.
[*] 50/50 TIPS/munis split means overall I'm ~15% TIPS and ~15% munis.
[*] Swedroe, Ferri et al suggest short-term TIPS. I don't quite understand how inflation in the 0-5yr timeline could be unexpected but especially given that I have lots of VWIUX Interm Term Munis, seems reasonable to go with short-term TIPS / interm-term munis.

Does any of that seem misguided to anyone?
All TIPS, regardless of duration, are equally protected against inflation. Their values are adjusted by the same amounts at the same intervals.

A rolling ladder of short-term TIPS, such as what a fund holds, will continue its inflation protection over the long term. Longer-term TIPS can be expected, in general and over the long run, to have higher real returns. In that aspect they work the same as other bonds.

Shorter-term TIPS, while not especially well correlated with realized inflation year by year, usually will be more closely correlated than longer-term ones. The choice depends on what you mean to achieve, and for some objectives a mix might work better than either alone.

Series I Savings Bonds are an option, if the annual purchase limits enable you to buy enough. You can add to your stake year by year.

PJW

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joeschmo
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Re: Difference between short-term TIPS funds?

Post by joeschmo » Sat Feb 15, 2020 3:05 am

Thanks, PJW! Sounds like I should be well served by 50/50 short TIPS / interm munis. I was wondering if nominal treasurys shouldn't be missing from this picture but it sounds like I'll be fine with just TIPS and munis for my goals of long-time-horizon investing and being OK in a high tax bracket.

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Re: Difference between short-term TIPS funds?

Post by Northern Flicker » Sat Feb 15, 2020 2:23 pm

Nominal treasuries, TIPS, and i-bonds are exempt from state income taxes.
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Re: Difference between short-term TIPS funds?

Post by GettingCloser » Thu Feb 20, 2020 7:51 pm

joeschmo wrote:
Thu Feb 13, 2020 2:00 am
Now that I have the right data, it's hard to understand why someone would go with short-term TIPS...in theory I want the inflation protection, since I may be investing over a 70-year time horizon. Am I missing something or would nominal treasuries have been better to own in the past decade? Why did short-term TIPS have zero nominal return between 2012 and mid-2015?
They (the TIPS themselves) didn't -- the short-term TIPS funds/indices did.


Individual TIPS held to maturity will have the steady real return determined at auction (or initial purchase, if bought on secondary market), without the up and down fluctuations shown in the graphs above (one could choose to estimate the value of those TIPS using their prices on the secondary market, but in that case, one would be wrong, since those prices have zero effect on TIPS held to maturity).

TIPS funds, and individual TIPS sold on the secondary market will fluctuate in price (and therefore, net return when sold) due to investor speculation and normal supply & demand effects.

Put another way:
  • When you buy individual TIPS to be held to maturity, what you're doing is buying inflation protection.
  • When you buy TIPS funds, or TIPS that you'll sell before maturity, what you're really doing is speculating on the public's changing attitudes towards the need for inflation protection.

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Re: Difference between short-term TIPS funds?

Post by Northern Flicker » Thu Feb 20, 2020 7:57 pm

If the TIPS bring held to maturity did not nature around mid-2015, the same market valuations of the TIPS held by the fund would apply to individual TIPS. The return of the TIPS you are holding up to a point in time is based on their market value at that point in time, just like for a TIPS fund. TIPS, whether held in a fund or held directly, lost value when interest rates rose in 2015 unless they matured in some time interval in 2015.
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