IVOL<== best TIPS ETF?

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stockmaster
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IVOL<== best TIPS ETF?

Post by stockmaster »

IVOL is:

1. The best-performing TIPS ETF over the past year (15.6%) (https://etfdb.com/etf/IVOL/#performance)
2. The highest-dividend TIPS ETF available (3.47%/monthly) (https://etfdb.com/etf/IVOL/#etf-ticker- ... n-dividend)
3. The 7th-biggest TIPS ETF by AUM (https://etfdb.com/screener/#page=1&asse ... types=TIPS)

Yeah the ER is high, but it looks like you're getting what you pay for with this one. Thoughts?
000
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Re: IVOL<== best TIPS ETF?

Post by 000 »

IVOL is not simply a TIPS ETF.

Its own homepage calls it "The Quadratic Interest Rate Volatility and Inflation Hedge ETF (IVOL)".

There is a lot in thus fund other than TIPS, search the forum for more.
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whodidntante
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Re: IVOL<== best TIPS ETF?

Post by whodidntante »

Surely you can find a better investment than that to combine with your time machine.
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FIREchief
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Re: IVOL<== best TIPS ETF?

Post by FIREchief »

A well thought out portfolio of individual TIPS is in all cases better/cheaper than even the "best TIPS ETF." 8-)
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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stockmaster
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Re: IVOL<== best TIPS ETF?

Post by stockmaster »

000 wrote: Mon Jan 11, 2021 10:32 pm IVOL is not simply a TIPS ETF.

Its own homepage calls it "The Quadratic Interest Rate Volatility and Inflation Hedge ETF (IVOL)".

There is a lot in thus fund other than TIPS, search the forum for more.
Yeah that's the main reason I made this thread, I've seen previous posts about IVOL and they all bring up the expense ratio. I'm curious if there are any who think it's actually worth the high ER.
linuxizer
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Re: IVOL<== best TIPS ETF?

Post by linuxizer »

FIREchief wrote: Tue Jan 12, 2021 12:01 am A well thought out portfolio of individual TIPS is in all cases better/cheaper than even the "best TIPS ETF." 8-)
https://www.bogleheads.org/wiki/Individ ... _bond_fund
000
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Re: IVOL<== best TIPS ETF?

Post by 000 »

stockmaster wrote: Wed Jan 13, 2021 2:31 am
000 wrote: Mon Jan 11, 2021 10:32 pm IVOL is not simply a TIPS ETF.

Its own homepage calls it "The Quadratic Interest Rate Volatility and Inflation Hedge ETF (IVOL)".

There is a lot in thus fund other than TIPS, search the forum for more.
Yeah that's the main reason I made this thread, I've seen previous posts about IVOL and they all bring up the expense ratio. I'm curious if there are any who think it's actually worth the high ER.
I don't think so, but the proper comparison isn't to TIPS ETFs, even though this fund holds TIPS as collateral for derivatives.
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stockmaster
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Re: IVOL<== best TIPS ETF?

Post by stockmaster »

000 wrote: Wed Jan 13, 2021 5:57 pm
stockmaster wrote: Wed Jan 13, 2021 2:31 am
000 wrote: Mon Jan 11, 2021 10:32 pm IVOL is not simply a TIPS ETF.

Its own homepage calls it "The Quadratic Interest Rate Volatility and Inflation Hedge ETF (IVOL)".

There is a lot in thus fund other than TIPS, search the forum for more.
Yeah that's the main reason I made this thread, I've seen previous posts about IVOL and they all bring up the expense ratio. I'm curious if there are any who think it's actually worth the high ER.
I don't think so, but the proper comparison isn't to TIPS ETFs, even though this fund holds TIPS as collateral for derivatives.
Then what should it be compared to?
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Re: IVOL<== best TIPS ETF?

Post by grabiner »

The TIPS ETF likely to have the highest return in the future is LTPZ, PIMCO 15+ Year US TIPS ETF. It is the only long-term TIPS ETF, and since long-term TIPS yield more than short-term TIPS, it should have higher returns.

The duration of 21 years means that the price will be more volatile over time than the price of other TIPS ETFs, but that may not be a concern if you are using the TIPS for long-term needs (for example, an HSA in CA or NJ saved for medical expenses in retirement, or a supplement to a non-inflation-linked pension that you have not yet started to draw).

The alternative would be to avoid the 0.20% expenses by buying long-term TIPS on the market.
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000
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Re: IVOL<== best TIPS ETF?

Post by 000 »

stockmaster wrote: Wed Jan 13, 2021 9:32 pm
000 wrote: Wed Jan 13, 2021 5:57 pm I don't think so, but the proper comparison isn't to TIPS ETFs, even though this fund holds TIPS as collateral for derivatives.
Then what should it be compared to?
There is no comparable fund to what IVOL is doing. It is a complex fund. You will need to dig through the prospectus and study derivatives before you decide if it belongs in your portfolio. It isn't a drop in replacement for TIPS or a TIPS fund.
FlantasticSea
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Re: IVOL<== best TIPS ETF?

Post by FlantasticSea »

So this fund (made-up of 85% SCHP) has done well because of near-constant increase in the 10-Y minus 2-Y treasury yields (https://fred.stlouisfed.org/series/T10Y2Y) since its inception.

During periods when this rate decreases is underperforms SCHP (https://www.portfoliovisualizer.com/bac ... ion2_2=100). It also underperforms SCHP when the rate is unchanging: https://www.portfoliovisualizer.com/bac ... ion2_2=100

I don't know enough about how/why yield curves flatten but I'm guessing there are more-simple / cheaper ways to accomplish what IVOL does.

Perhaps the most obvious (to me), would be to reduce any holdings in intermediate/long-term bond funds and increase holdings of short-term TIPS (VTIP) as the former will underperform and the latter will hold steady. You could also hold more short-term bonds but I doubt that will decrease volatility as much.

For a 33/33/33 (VT, BND, TIPS), the strategy I mentioned would have underperformed an IVOl portfolio for the past 6 months as the 10Y-2Y rate increased but still manages to reduce volatility (https://www.portfoliovisualizer.com/bac ... tion6_2=17). Slightly outperforms while the 10Y-2Y has stayed flat (https://www.portfoliovisualizer.com/bac ... tion6_2=17), and it outperforms when the 10Y-2Y slightly decreases (https://www.portfoliovisualizer.com/bac ... tion6_2=17).

Backtesting is extremely fallible but I think the logic behind these movements will make them hold mostly true in the future.

TLDR: Unless you're planning on trying to time the market with IVOL I think you'd be better off staying away from its high expense ratio and opting for more TIPS and less long-term bonds.

Let me know if I'm wrong about something (likely) or if you disagree.
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Re: IVOL<== best TIPS ETF?

Post by GaryA505 »

stockmaster wrote: Wed Jan 13, 2021 2:31 am
000 wrote: Mon Jan 11, 2021 10:32 pm IVOL is not simply a TIPS ETF.

Its own homepage calls it "The Quadratic Interest Rate Volatility and Inflation Hedge ETF (IVOL)".

There is a lot in thus fund other than TIPS, search the forum for more.
Yeah that's the main reason I made this thread, I've seen previous posts about IVOL and they all bring up the expense ratio. I'm curious if there are any who think it's actually worth the high ER.
I do. I could be wrong, but I think I'm not.

I have a small percentage as a rates hedge.
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Re: IVOL<== best TIPS ETF?

Post by NoRegret »

OK, maybe it's time to update my last post on IVOL here:
viewtopic.php?f=10&t=324165&p=5578529&h ... l#p5578529

At the time I was still hoping there was another hurrah in long bonds. Instead stocks have continued to rally and yields have being going up. so I started moving more EDV into IVOL -- by inverse volatility the IVOL:EDV ratio should be about 4 or 5 in favor of IVOL. Although on the days they move it's more like 8-10:1. I finally got out of all my EDV this month, my line-in-sand was the 10 yr ($TNX) above 1%.

When I started buying IVOL last August, its AUM was under $300MM, now it's $1B, kudos to them. The curve spread (on their website: DV01), usually above 0.03 is now 0.0289. So they may be expecting $TNX to retest the breakout, but I don't see anything that would reverse the long term curve steepening trend. Even if B117 turns out to be serious and it may very well, I don't expect it to have a long-lasting effect.

I have IVOL in my Roth IRA which is really valuable space so I've activated the brokerage window in my 401k with the intention of moving IVOL there instead, and maybe even replacing additional stable value funds.

These are what I'm doing with my own money, YMMV.
Market timer targeting long term cycles -- aiming for several key decisions per asset class per decade
NoRegret
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Re: IVOL<== best TIPS ETF?

Post by NoRegret »

FlantasticSea wrote: Fri Jan 15, 2021 2:15 pm I don't know enough about how/why yield curves flatten but I'm guessing there are more-simple / cheaper ways to accomplish what IVOL does.
Such as? I don't know how to trade interest rate futures and I don't think it can be easily replicated with ZN/ZT. Of course thematically one can buy financials for the net interest margin increase but that introduces other dependencies.
Market timer targeting long term cycles -- aiming for several key decisions per asset class per decade
FlantasticSea
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Re: IVOL<== best TIPS ETF?

Post by FlantasticSea »

NoRegret wrote: Sun Jan 17, 2021 11:19 pm
FlantasticSea wrote: Fri Jan 15, 2021 2:15 pm I don't know enough about how/why yield curves flatten but I'm guessing there are more-simple / cheaper ways to accomplish what IVOL does.
Such as? I don't know how to trade interest rate futures and I don't think it can be easily replicated with ZN/ZT. Of course thematically one can buy financials for the net interest margin increase but that introduces other dependencies.
Ah, I worded that poorly.

I meant that I think there's a cheaper / less-risky way to create a similar effect on your portfolio that someone adding IVOL may be hoping for. You would [likely] add IVOL if you want TIPS + a hedge against rising long-term interest rates.

IVOL performed so well in 2020 because 2Y interest rates dropped near zero (https://fred.stlouisfed.org/series/DGS2). There's now no where else for them to fall unless you think they'll go negative (unlikely, IMO). So now if long-term rates stay flat, decline, or if 2Y treasury rates increase, then IVOL will perform poorly. Also, if long term interest rates rise then any long-term bonds/TIPS will perform terribly which will nullify IVOLs gains in most balanced portfolios.

Therefore, if you hold long-term bonds in your portfolio and want the kind of hedging that IVOL offers you would likely be better off reducing your exposure to long-term bonds/TIPS and buying more short term bonds/tips. If done properly the effect will be similar and you will save yourself the 1% expense ratio (and perhaps more in the long run).

Example of what I think may be a better [hedged against rising interest rates] portfolio now that 2Y interest rates fell: https://www.portfoliovisualizer.com/bac ... tion9_2=10

IVOL can still be good for anyone specifically trying to market time the yield curve or whom doesn't own long-term bonds/tips. I also could be completely wrong about everything I'm saying.
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Re: IVOL<== best TIPS ETF?

Post by NoRegret »

FlantasticSea wrote: Sun Jan 17, 2021 11:37 pm
NoRegret wrote: Sun Jan 17, 2021 11:19 pm
FlantasticSea wrote: Fri Jan 15, 2021 2:15 pm I don't know enough about how/why yield curves flatten but I'm guessing there are more-simple / cheaper ways to accomplish what IVOL does.
Such as? I don't know how to trade interest rate futures and I don't think it can be easily replicated with ZN/ZT. Of course thematically one can buy financials for the net interest margin increase but that introduces other dependencies.
Ah, I worded that poorly.

I meant that I think there's a cheaper / less-risky way to create a similar effect on your portfolio that someone adding IVOL may be hoping for. You would [likely] add IVOL if you want TIPS + a hedge against rising long-term interest rates.

IVOL performed so well in 2020 because 2Y interest rates dropped near zero (https://fred.stlouisfed.org/series/DGS2). There's now no where else for them to fall unless you think they'll go negative (unlikely, IMO). So now if long-term rates stay flat, decline, or if 2Y treasury rates increase, then IVOL will perform poorly. Also, if long term interest rates rise then any long-term bonds/TIPS will perform terribly which will nullify IVOLs gains in most balanced portfolios.

Therefore, if you hold long-term bonds in your portfolio and want the kind of hedging that IVOL offers you would likely be better off reducing your exposure to long-term bonds/TIPS and buying more short term bonds/tips. If done properly the effect will be similar and you will save yourself the 1% expense ratio (and perhaps more in the long run).

Example of what I think is a better portfolio now that 2Y interest rates fell: https://www.portfoliovisualizer.com/bac ... tion9_2=10

IVOL can still be good for anyone specifically trying to market time the yield curve or whom doesn't own long-term bonds/tips. I also could be completely wrong about everything I'm saying.
???
My expectation is for 2s10s to continue steepen based on 1) the short end pinned by Fed, and 2) headline inflation to heat up in 1H'21 based on YoY comparison against 1H'20 -- possible deleterious effects from B117 still to be seen.

The Fed is on record saying they will let inflation run hot so I expect the long end of the curve to rise and inflation expectation to rise even faster, thus lowering real rates.

If that is correct both the TIP complex and the curve steepener will do well but nominal bonds won't. Note I have not said anything about fiscal spending already baked in or any reflexive QE/fiscal stimulus if there is another crisis. Over the next several years, I don't see why the 2s10s spread can't go back to 2-3%.
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Re: IVOL<== best TIPS ETF?

Post by FlantasticSea »

NoRegret wrote: Mon Jan 18, 2021 12:23 am
???
My expectation is for 2s10s to continue steepen based on 1) the short end pinned by Fed, and 2) headline inflation to heat up in 1H'21 based on YoY comparison against 1H'20 -- possible deleterious effects from B117 still to be seen.

The Fed is on record saying they will let inflation run hot so I expect the long end of the curve to rise and inflation expectation to rise even faster, thus lowering real rates.

If that is correct both the TIP complex and the curve steepener will do well but nominal bonds won't. Note I have not said anything about fiscal spending already baked in or any reflexive QE/fiscal stimulus if there is another crisis. Over the next several years, I don't see why the 2s10s spread can't go back to 2-3%.
As I mentioned before, I have no qualms against IVOL for anyone looking to market time. I can tell from your signature that that interests you.

I was looking at it more from a long term view and trying to answer OPs question of "Is IVOl the best TIPS fund [because it performed so well the past year]".
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Re: IVOL<== best TIPS ETF?

Post by NoRegret »

FlantasticSea wrote: Mon Jan 18, 2021 12:36 am
NoRegret wrote: Mon Jan 18, 2021 12:23 am
???
My expectation is for 2s10s to continue steepen based on 1) the short end pinned by Fed, and 2) headline inflation to heat up in 1H'21 based on YoY comparison against 1H'20 -- possible deleterious effects from B117 still to be seen.

The Fed is on record saying they will let inflation run hot so I expect the long end of the curve to rise and inflation expectation to rise even faster, thus lowering real rates.

If that is correct both the TIP complex and the curve steepener will do well but nominal bonds won't. Note I have not said anything about fiscal spending already baked in or any reflexive QE/fiscal stimulus if there is another crisis. Over the next several years, I don't see why the 2s10s spread can't go back to 2-3%.
As I mentioned before, I have no qualms against IVOL for anyone looking to market time. I can tell from your signature that that interests you.

I was looking at it more from a long term view and trying to answer OPs question of "Is IVOl the best TIPS fund [because it performed so well the past year]".
Fair enough. Thanks for the discussion.
Market timer targeting long term cycles -- aiming for several key decisions per asset class per decade
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Re: IVOL<== best TIPS ETF?

Post by grok87 »

grabiner wrote: Wed Jan 13, 2021 9:45 pm The TIPS ETF likely to have the highest return in the future is LTPZ, PIMCO 15+ Year US TIPS ETF. It is the only long-term TIPS ETF, and since long-term TIPS yield more than short-term TIPS, it should have higher returns.

The duration of 21 years means that the price will be more volatile over time than the price of other TIPS ETFs, but that may not be a concern if you are using the TIPS for long-term needs (for example, an HSA in CA or NJ saved for medical expenses in retirement, or a supplement to a non-inflation-linked pension that you have not yet started to draw).

The alternative would be to avoid the 0.20% expenses by buying long-term TIPS on the market.
agree. and of course ibonds are even better with their 0% real yield vs. Long term tips at -0.36% and the broad tips index at -1.41%.
RIP Mr. Bogle.
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Re: IVOL<== best TIPS ETF?

Post by vineviz »

NoRegret wrote: Mon Jan 18, 2021 12:23 am If that is correct both the TIP complex and the curve steepener will do well but nominal bonds won't. Note I have not said anything about fiscal spending already baked in or any reflexive QE/fiscal stimulus if there is another crisis. Over the next several years, I don't see why the 2s10s spread can't go back to 2-3%.
It certainly is possible that the CMS10minus2 can go back to 2-3%: it definitely as done so before. However, there have also been long periods of time (15+years) where it never got above 1%.

Image

I don't have any historical data on actual interest rate swap pricing, but some rough simulations suggest that USUALLY a fund like IVOL will behave similarly to a vanilla TIPS fund. However, if the 10minus2 spread is unchanging or (worse) trends down then IVOL will dramatically underperform TIPS.

Just for context, if something like IVOL had been available at the beginning of 2004 I estimate that investors would have lost over 23% through mid-2007 whereas an investor in iShares TIPS Bond ETF (TIP) would have gained about 12%.

In investor who purchased $10,000 worth of my simulated IVOL at the LOWEST point for the 10minus2 spread in recent history (November, 2006) and managed to hold on through January, 2021 would have seen their $10,000 grow to $11,736 over that fourteen year period. An investor in the iShares TIPS ETF would have $18,429 instead.

Image

Like I said, I don't have 100% confidence in my simulation but directionally it makes sense: the long-run expected return on the interest rate swaps is approximately zero, and the cost of buying those options plus the management fees creates a long-run drag on returns that will be hard to overcome.

So I wouldn't consider using a fund like IVOL as anything other than a short-term speculative bet. I certainly would not expect it to play the same role in the portfolio as a plain Jane TIPS fund.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
NoRegret
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Re: IVOL<== best TIPS ETF?

Post by NoRegret »

vineviz wrote: Mon Jan 18, 2021 9:12 am It certainly is possible that the CMS10minus2 can go back to 2-3%: it definitely as done so before. However, there have also been long periods of time (15+years) where it never got above 1%.

I don't have any historical data on actual interest rate swap pricing, but some rough simulations suggest that USUALLY a fund like IVOL will behave similarly to a vanilla TIPS fund. However, if the 10minus2 spread is unchanging or (worse) trends down then IVOL will dramatically underperform TIPS.

Just for context, if something like IVOL had been available at the beginning of 2004 I estimate that investors would have lost over 23% through mid-2007 whereas an investor in iShares TIPS Bond ETF (TIP) would have gained about 12%.

In investor who purchased $10,000 worth of my simulated IVOL at the LOWEST point for the 10minus2 spread in recent history (November, 2006) and managed to hold on through January, 2021 would have seen their $10,000 grow to $11,736 over that fourteen year period. An investor in the iShares TIPS ETF would have $18,429 instead.

Image

Like I said, I don't have 100% confidence in my simulation but directionally it makes sense: the long-run expected return on the interest rate swaps is approximately zero, and the cost of buying those options plus the management fees creates a long-run drag on returns that will be hard to overcome.

So I wouldn't consider using a fund like IVOL as anything other than a short-term speculative bet. I certainly would not expect it to play the same role in the portfolio as a plain Jane TIPS fund.
I haven't looked at your simulation in detail but agree with its general direction: one ought not to hold IVOL during a disinflationary period, especially when the 2s10s spread lacks a clear uptrend. My intended holding period for IVOL, if not already clear, is the next couple of years. If the 2s10s spread gets to 2-3% quickly I'll re-evaluate. If there is structural inflation and yield curve control even at the long end then the candidate would be LTPZ.

One thing that has not been discussed in this thread and was touched upon in the last was the manager's ability to harness rate volatility as well as the rebalancing premium between SCHP and OTC rate derivatives. I believe we've transitioned into an elevated vol environment, probably until 2023. So the opportunities should be there.

As a holder of IVOL I certainly hope its fees are lower. But the pursuit of low fees ought not to come at the expense of actual after-fees performance. If I can construct a more cost-effective alternative to get the same exposure I definitely would.
Market timer targeting long term cycles -- aiming for several key decisions per asset class per decade
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Re: IVOL<== best TIPS ETF?

Post by vineviz »

NoRegret wrote: Mon Jan 18, 2021 1:01 pm One thing that has not been discussed in this thread and was touched upon in the last was the manager's ability to harness rate volatility as well as the rebalancing premium between SCHP and OTC rate derivatives. I believe we've transitioned into an elevated vol environment, probably until 2023. So the opportunities should be there.

As a holder of IVOL I certainly hope its fees are lower. But the pursuit of low fees ought not to come at the expense of actual after-fees performance. If I can construct a more cost-effective alternative to get the same exposure I definitely would.
The challenge, of course, is that the expected return of IVOL is lower than SCHP. There is no underlying economic exposure in IVOL with any value except the TIPS. You NEED the managers to add enough alpha through options buying to make up for the costs, and the history of related strategies (eg S&P buy/write funds) isn’t encouraging.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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