TIPS
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TIPS
If TIPS are meant to hold with inflation, why would it not be smart to hold cash in a TIPS Index/ETF, in a taxable account? Especially if I’m not currently in a high tax bracket.
I’m sure I’m going to receive a lot of heat from people for market timing, but that question is more focused on where to store a short term cash chunk that I am holding off on investing pending the impending bear market everyone is “predicting” in the next 12-18 months.
I’m sure I’m going to receive a lot of heat from people for market timing, but that question is more focused on where to store a short term cash chunk that I am holding off on investing pending the impending bear market everyone is “predicting” in the next 12-18 months.
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Re: TIPS
There is interest rate risk associated with TIPS. I don't know of a TIPS fund with shorter duration than VTIP which is about 3 years. I-bonds might be a better option for you
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Re: TIPS
Indeed. If someone's investment horizon is 12-18 months, one should match this with the average duration of one's bond holdings in order to minimize interest rate risk. VTIP has an average duration of 2.7 years, so there is a bit of a mismatch with the investment horizon.chrisdds98 wrote: ↑Thu Jun 17, 2021 5:12 pm There is interest rate risk associated with TIPS. I don't know of a TIPS fund with shorter duration than VTIP which is about 3 years. I-bonds might be a better option for you
The Vanguard Ultra-Short Bond ETF (VUSB) has an average duration of one year, and is therefore more suitable. As the horizon gets smaller, however, you need to begin to transfer money into an instrument with an even shorter duration, like your settlement fund, so that the weighted-average duration between the funds stays matched to the diminishing time horizon. For example, if you split your money equally between the settlement fund and the ultra-short bond fund, your duration would be six months.
(Actually, not quite sure about that. The duration of a money market fund might be a bit more than that.)
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Re: TIPS
What is the "interest rate risk"?
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Re: TIPS
It is a fluctuation in the market value of a bond. It occurs if you want to buy or sell a bond at some time in between issue and maturity. Since a bond fund holds many bonds with different issue and maturity dates, it is always expose to interest rate risk.
Suppose you have paid $1,000 to buy a ten-year bond that pays 1% per year in interest. Five years after you buy it, you decide that you don't want to hold it to maturity, you want to sell it now. At the time when you sell it, you are competing against newly-issued five-year bonds. If the interest rate has risen, to 2% say, a person who buys a newly issued bond is going to receive bigger coupon payments than they will from your bond. So they will not be willing to pay $1,000 for your bond. They will only buy your bond if you are willing to sell it at a lower, discounted price. That price is almost perfectly determined by "bond math," but it depends on the interest rate available at the time you want to sell your bond. Bond math says that if the interest rate has not changed, your bond is worth $1,000. But if the interest rate has risen, you are competing against better bonds, so your bond is worth less than $1,000. If the interest rate has fallen, your bond is better than the competition, and you can get more than $1,000 for it.
This fluctuation in the value of bonds and bond funds, due to changes in the interest rate, is "interest rate risk."
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Re: TIPS
It depends why interest rates go up. If it is just increased inflation expectations, TIPS should track up. If it is a steepening of the yield curve, TIPS can lose value.
Re: TIPS
This will obviously depend on the details, but… Both the interest on TIPS *and* principal increases are taxable in the year in which they occur. In other words, growth is *not* tax deferred. As such, most avoid holding TIPS in taxable.eastcoastbogle wrote: ↑Thu Jun 17, 2021 5:00 pm If TIPS are meant to hold with inflation, why would it not be smart to hold cash in a TIPS Index/ETF, in a taxable account? Especially if I’m not currently in a high tax bracket.
Details: https://www.treasurydirect.gov/indiv/re ... ps_tax.htm
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Re: TIPS
is that an issue for an ETF like VTIP or SCHP in a taxable account?exigent wrote: ↑Thu Jun 17, 2021 7:55 pmThis will obviously depend on the details, but… Both the interest on TIPS *and* principal increases are taxable in the year in which they occur. In other words, growth is *not* tax deferred. As such, most avoid holding TIPS in taxable.eastcoastbogle wrote: ↑Thu Jun 17, 2021 5:00 pm If TIPS are meant to hold with inflation, why would it not be smart to hold cash in a TIPS Index/ETF, in a taxable account? Especially if I’m not currently in a high tax bracket.
Details: https://www.treasurydirect.gov/indiv/re ... ps_tax.htm
Re: TIPS
Yes and no (as I understand it). See this link, near bottom of second page, “phantom income.” The funds actually pay this adjustment out so, while it’s taxable in the year in which it occurs (which is bad), at least the dollars are made available to you to handle the taxes — which is kinda, sorta is good?chrisdds98 wrote: ↑Thu Jun 17, 2021 8:08 pmis that an issue for an ETF like VTIP or SCHP in a taxable account?exigent wrote: ↑Thu Jun 17, 2021 7:55 pmThis will obviously depend on the details, but… Both the interest on TIPS *and* principal increases are taxable in the year in which they occur. In other words, growth is *not* tax deferred. As such, most avoid holding TIPS in taxable.eastcoastbogle wrote: ↑Thu Jun 17, 2021 5:00 pm If TIPS are meant to hold with inflation, why would it not be smart to hold cash in a TIPS Index/ETF, in a taxable account? Especially if I’m not currently in a high tax bracket.
Details: https://www.treasurydirect.gov/indiv/re ... ps_tax.htm
Re: TIPS
Yes and no (as I understand it). Look near bottom of the second page of this linked document, under “phantom income.”chrisdds98 wrote: ↑Thu Jun 17, 2021 8:08 pmis that an issue for an ETF like VTIP or SCHP in a taxable account?exigent wrote: ↑Thu Jun 17, 2021 7:55 pmThis will obviously depend on the details, but… Both the interest on TIPS *and* principal increases are taxable in the year in which they occur. In other words, growth is *not* tax deferred. As such, most avoid holding TIPS in taxable.eastcoastbogle wrote: ↑Thu Jun 17, 2021 5:00 pm If TIPS are meant to hold with inflation, why would it not be smart to hold cash in a TIPS Index/ETF, in a taxable account? Especially if I’m not currently in a high tax bracket.
Details: https://www.treasurydirect.gov/indiv/re ... ps_tax.htm
https://www.ishares.com/us/literature/b ... -en-us.pdf
The funds actually pay this adjustment out so, while it’s taxable in the year in which it occurs (which is bad), at least the dollars are made available to you to handle the taxes — which is kinda, sorta good?
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Re: TIPS
Yes, so to illustrate your point. (And I hope I got this right!)NiceUnparticularMan wrote: ↑Thu Jun 17, 2021 7:49 pmIt depends why interest rates go up. If it is just increased inflation expectations, TIPS should track up. If it is a steepening of the yield curve, TIPS can lose value.
Let's say Karen buys $1000 of individual 30yr TIPS in a non-taxable account with a yield of 0%. (At the moment it's actually -0.17%, but let's simplify it.) If Karen holds the TIPS to maturity, her money will exactly match whatever inflation was for that 30 year period.
Let's say, however, that over the course of the year after Karen purchased her TIPS, the yield on the 30yr goes up to 1%. (This yield represents the amount investors demand over inflation.) If that were to happen, Karen's TIPS would lose a lot of value. (Errr...about 30%?) The value, however, would, over the next 29 years keep going up, so that at year 30, they would be fully recovered.
So, if you have individual TIPS, the trick is to hold them to maturity. And if you have a TIPS fund, the trick there is similar, to match one's investment horizon with the average duration of the funds you hold. (You can control the duration by owning two TIPS funds and rebalancing accordingly.) If someone wants more details on the mechanics of this, please ask.
And...I hope that was all correct. Please someone correct me if it wasn't.
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Re: TIPS
interesting, thanks for the link. This is a pretty significant advantage over holding individual TIPS, right?exigent wrote: ↑Thu Jun 17, 2021 8:32 pmYes and no (as I understand it). Look near bottom of the second page of this linked document, under “phantom income.”chrisdds98 wrote: ↑Thu Jun 17, 2021 8:08 pmis that an issue for an ETF like VTIP or SCHP in a taxable account?exigent wrote: ↑Thu Jun 17, 2021 7:55 pmThis will obviously depend on the details, but… Both the interest on TIPS *and* principal increases are taxable in the year in which they occur. In other words, growth is *not* tax deferred. As such, most avoid holding TIPS in taxable.eastcoastbogle wrote: ↑Thu Jun 17, 2021 5:00 pm If TIPS are meant to hold with inflation, why would it not be smart to hold cash in a TIPS Index/ETF, in a taxable account? Especially if I’m not currently in a high tax bracket.
Details: https://www.treasurydirect.gov/indiv/re ... ps_tax.htm
https://www.ishares.com/us/literature/b ... -en-us.pdf
The funds actually pay this adjustment out so, while it’s taxable in the year in which it occurs (which is bad), at least the dollars are made available to you to handle the taxes — which is kinda, sorta good?
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Re: TIPS
I can confirm I have read that trait as being one of the desirable ones over holding individual TIPS. Personally, I own both funds and individual TIPS. Vanguard, annoyingly, doesn't offer a long-term TIPS fund, and LTPZ has got a high expense ratio compared to Vanguard.chrisdds98 wrote: ↑Thu Jun 17, 2021 9:06 pminteresting, thanks for the link. This is a pretty significant advantage over holding individual TIPS, right?exigent wrote: ↑Thu Jun 17, 2021 8:32 pmYes and no (as I understand it). Look near bottom of the second page of this linked document, under “phantom income.”chrisdds98 wrote: ↑Thu Jun 17, 2021 8:08 pmis that an issue for an ETF like VTIP or SCHP in a taxable account?exigent wrote: ↑Thu Jun 17, 2021 7:55 pmThis will obviously depend on the details, but… Both the interest on TIPS *and* principal increases are taxable in the year in which they occur. In other words, growth is *not* tax deferred. As such, most avoid holding TIPS in taxable.eastcoastbogle wrote: ↑Thu Jun 17, 2021 5:00 pm If TIPS are meant to hold with inflation, why would it not be smart to hold cash in a TIPS Index/ETF, in a taxable account? Especially if I’m not currently in a high tax bracket.
Details: https://www.treasurydirect.gov/indiv/re ... ps_tax.htm
https://www.ishares.com/us/literature/b ... -en-us.pdf
The funds actually pay this adjustment out so, while it’s taxable in the year in which it occurs (which is bad), at least the dollars are made available to you to handle the taxes — which is kinda, sorta good?
Re: TIPS
LTPZ is the only game in town for most investors who want a long term TIPs fund. And while that e/r is higher than most index funds at Vanguard, I wouldn't exactly call it high at 0.20%Robot Monster wrote: ↑Thu Jun 17, 2021 9:13 pmI can confirm I have read that trait as being one of the desirable ones over holding individual TIPS. Personally, I own both funds and individual TIPS. Vanguard, annoyingly, doesn't offer a long-term TIPS fund, and LTPZ has got a high expense ratio compared to Vanguard.chrisdds98 wrote: ↑Thu Jun 17, 2021 9:06 pminteresting, thanks for the link. This is a pretty significant advantage over holding individual TIPS, right?exigent wrote: ↑Thu Jun 17, 2021 8:32 pmYes and no (as I understand it). Look near bottom of the second page of this linked document, under “phantom income.”chrisdds98 wrote: ↑Thu Jun 17, 2021 8:08 pmis that an issue for an ETF like VTIP or SCHP in a taxable account?exigent wrote: ↑Thu Jun 17, 2021 7:55 pm
This will obviously depend on the details, but… Both the interest on TIPS *and* principal increases are taxable in the year in which they occur. In other words, growth is *not* tax deferred. As such, most avoid holding TIPS in taxable.
Details: https://www.treasurydirect.gov/indiv/re ... ps_tax.htm
https://www.ishares.com/us/literature/b ... -en-us.pdf
The funds actually pay this adjustment out so, while it’s taxable in the year in which it occurs (which is bad), at least the dollars are made available to you to handle the taxes — which is kinda, sorta good?
That said, I'm actually surprised that other providers haven't jumped in to offer some competition. Perhaps with all of the recent inflation talk, that'll change.
Cheers.
Re: TIPS
VAIPX...TIPS fund...7.2 years, ER= .1% or $1000 on $1 million per year
LTPZ....TIPS ETF ...21.3 years, ER = .2% or $2000 on $1 million per year
Individual TIPS....ER = 0 or $0 per year
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Re: TIPS
That 0.2% has to be some easy money. Once a year they buy the new bond and then what? What do they do all day?dcabler wrote: ↑Fri Jun 18, 2021 6:33 amLTPZ is the only game in town for most investors who want a long term TIPs fund. And while that e/r is higher than most index funds at Vanguard, I wouldn't exactly call it high at 0.20%Robot Monster wrote: ↑Thu Jun 17, 2021 9:13 pmI can confirm I have read that trait as being one of the desirable ones over holding individual TIPS. Personally, I own both funds and individual TIPS. Vanguard, annoyingly, doesn't offer a long-term TIPS fund, and LTPZ has got a high expense ratio compared to Vanguard.chrisdds98 wrote: ↑Thu Jun 17, 2021 9:06 pminteresting, thanks for the link. This is a pretty significant advantage over holding individual TIPS, right?exigent wrote: ↑Thu Jun 17, 2021 8:32 pmYes and no (as I understand it). Look near bottom of the second page of this linked document, under “phantom income.”chrisdds98 wrote: ↑Thu Jun 17, 2021 8:08 pm
is that an issue for an ETF like VTIP or SCHP in a taxable account?
https://www.ishares.com/us/literature/b ... -en-us.pdf
The funds actually pay this adjustment out so, while it’s taxable in the year in which it occurs (which is bad), at least the dollars are made available to you to handle the taxes — which is kinda, sorta good?
That said, I'm actually surprised that other providers haven't jumped in to offer some competition. Perhaps with all of the recent inflation talk, that'll change.
Cheers.
We plan. G-d laughs.
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Re: TIPS
Right, if you hold TIPS to maturity you get whatever you were originally expecting real--0% in this case.Robot Monster wrote: ↑Thu Jun 17, 2021 8:50 pmYes, so to illustrate your point. (And I hope I got this right!)NiceUnparticularMan wrote: ↑Thu Jun 17, 2021 7:49 pmIt depends why interest rates go up. If it is just increased inflation expectations, TIPS should track up. If it is a steepening of the yield curve, TIPS can lose value.
Let's say Karen buys $1000 of individual 30yr TIPS in a non-taxable account with a yield of 0%. (At the moment it's actually -0.17%, but let's simplify it.) If Karen holds the TIPS to maturity, her money will exactly match whatever inflation was for that 30 year period.
Let's say, however, that over the course of the year after Karen purchased her TIPS, the yield on the 30yr goes up to 1%. (This yield represents the amount investors demand over inflation.) If that were to happen, Karen's TIPS would lose a lot of value. (Errr...about 30%?) The value, however, would, over the next 29 years keep going up, so that at year 30, they would be fully recovered.
So, if you have individual TIPS, the trick is to hold them to maturity. And if you have a TIPS fund, the trick there is similar, to match one's investment horizon with the average duration of the funds you hold. (You can control the duration by owning two TIPS funds and rebalancing accordingly.) If someone wants more details on the mechanics of this, please ask.
And...I hope that was all correct. Please someone correct me if it wasn't.
But I was also pointing out that suppose nominal rates go up 1% because expected inflation goes up 1%. Nominal bonds will drop in value, but TIPS should not, because investors will expect the nominal rate on TIPS to go up the same 1%.
So, in other words, TIPS will lose value if expected real rates go up, but should not lose value if nominal rates go up but not expected real rates, and nominal bonds will lose value either way if rates go up.
Re: TIPS
Nothing. Robots do it.MishkaWorries wrote: ↑Fri Jun 18, 2021 6:58 amThat 0.2% has to be some easy money. Once a year they buy the new bond and then what? What do they do all day?dcabler wrote: ↑Fri Jun 18, 2021 6:33 amLTPZ is the only game in town for most investors who want a long term TIPs fund. And while that e/r is higher than most index funds at Vanguard, I wouldn't exactly call it high at 0.20%Robot Monster wrote: ↑Thu Jun 17, 2021 9:13 pmI can confirm I have read that trait as being one of the desirable ones over holding individual TIPS. Personally, I own both funds and individual TIPS. Vanguard, annoyingly, doesn't offer a long-term TIPS fund, and LTPZ has got a high expense ratio compared to Vanguard.chrisdds98 wrote: ↑Thu Jun 17, 2021 9:06 pminteresting, thanks for the link. This is a pretty significant advantage over holding individual TIPS, right?exigent wrote: ↑Thu Jun 17, 2021 8:32 pm
Yes and no (as I understand it). Look near bottom of the second page of this linked document, under “phantom income.”
https://www.ishares.com/us/literature/b ... -en-us.pdf
The funds actually pay this adjustment out so, while it’s taxable in the year in which it occurs (which is bad), at least the dollars are made available to you to handle the taxes — which is kinda, sorta good?
That said, I'm actually surprised that other providers haven't jumped in to offer some competition. Perhaps with all of the recent inflation talk, that'll change.
Cheers.
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Re: TIPS
Nice gig.dcabler wrote: ↑Fri Jun 18, 2021 2:28 pmNothing. Robots do it.MishkaWorries wrote: ↑Fri Jun 18, 2021 6:58 amThat 0.2% has to be some easy money. Once a year they buy the new bond and then what? What do they do all day?dcabler wrote: ↑Fri Jun 18, 2021 6:33 amLTPZ is the only game in town for most investors who want a long term TIPs fund. And while that e/r is higher than most index funds at Vanguard, I wouldn't exactly call it high at 0.20%Robot Monster wrote: ↑Thu Jun 17, 2021 9:13 pmI can confirm I have read that trait as being one of the desirable ones over holding individual TIPS. Personally, I own both funds and individual TIPS. Vanguard, annoyingly, doesn't offer a long-term TIPS fund, and LTPZ has got a high expense ratio compared to Vanguard.chrisdds98 wrote: ↑Thu Jun 17, 2021 9:06 pm
interesting, thanks for the link. This is a pretty significant advantage over holding individual TIPS, right?
That said, I'm actually surprised that other providers haven't jumped in to offer some competition. Perhaps with all of the recent inflation talk, that'll change.
Cheers.
We plan. G-d laughs.