Short term TIPS etf compared to short term treasury etf

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dagothbob
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Short term TIPS etf compared to short term treasury etf

Post by dagothbob »

I'm wondering if it's a good idea to invest in a short term TIPS etf instead of short term treasury etf, for preserving money in the short run. (Let's assume I'm already maxed out on I-bonds and I don't want to deal with actual TIPS from TreasuryDirect.) When I look at the total return of a TIPS etf it seems like it should be:

(market price changes due to yield changes) + (yield before inflation adjustment) + (inflation adjustment)

I'm looking at the STIP short term treasury etf. The market price has gone down this year due to interest rates rising, causing the YTD NAV return to be -7.6%. The NAV return doesn't include the yield or the inflation adjustment. I think the yield before inflation adjustment is approximately the "real yield" on that page, which is 1.59%. The 30 day SEC yield with inflation adjustment is 7.78%, so if you take the difference of those two numbers the inflation adjustment is 6.19%. This seems like you would about break even for the year in nominal terms, but actually the YTD total return is -2.26% because the yield was not as high earlier in the year.

When I compare this to a short term treasury fund like SHY, the total return should be:

(market price changes due to yield changes) + (yield)

Again, the market price has gone down this year, causing the YTD NAV return of SHY to be -4.7%. The 30 day SEC yield is 3.48%. This is only 1.89% higher than STIP's yield before inflation adjustment. The YTD total return is -4.11%, which is worse than STIP.

So why is the market valuing STIP's inflation adjustment at only 1.89% when yearly inflation and month-to-month (annualized) inflation have been much higher than that? Maybe the market is expecting month-to-month inflation to be much lower moving forward, which is what the TIPS inflation adjustment is based on. But I don't expect this to happen within the next month or two. This page shows the month-to-month (annualized) inflation rate, and based on the smoothness of the curve it doesn't seem like it could suddenly jump from 8.3% to 2% in a month. (I also don't understand why STIP's inflation adjustment is 6.19% instead of about 8.3%, but minor details). And if inflation goes down, or the STIP yield gets worse compared to the SHY yield, I can always just sell and switch to SHY.

So since the STIP yield after inflation adjustment is much higher than SHY, it seems like I should go with STIP over SHY, but I must be missing something because the market tends to be efficient. One possibility is that the market price of STIP is expected to go down compared to the market price of SHY. This did happen earlier this year. The YTD NAV return of STIP is worse than that of SHY, because the yield of STIP went up more, causing its price to go down more than SHY. What caused this to happen? Something like changes in the month-to-month inflation rate, or future inflation expectations?

Edit: actually the month-to-month inflation rates are here and after multiplying by 12, they actually can suddenly jump. But then I don't understand why the inflation adjustment is 6.19% when the month-to-month inflation is 0.1%*12.
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jeffyscott
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Re: Short term TIPS etf compared to short term treasury etf

Post by jeffyscott »

The reference CPI has increased by about 0.52% in the past 30 days, compounded over 12 months that's about 6.4%. TIPS also have coupons, so the 30 day nominal SEC yield reflects those two things, more or less. The reference CPI change over the past 30 days is currently based on the July and August inflation figures.

Ref. CPI is here: http://eyebonds.info/tips/2022/tips00_2022.html

(The 0-5 year TIPS prices are also mostly below 100, so I think that increases the reported yield a bit, too. For example, if the price is 95, then the 6.4% inflation adjustment would become about 6.7%.)

The market being efficient does not mean that it always accurately predicts the future. The future is always unknown. TIPS have done better than nominals recently because inflation has exceeded expectations. We don't know if inflation will meet, exceed, or be below expectations in the future.
And so it goes, And so it goes, And so it goes, And so it goes, But where it's goin' no one knows
billyt
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Re: Short term TIPS etf compared to short term treasury etf

Post by billyt »

I believe that the SEC yield is forward looking, as it is based on yield to maturity.

"Changes in the SEC yield for VGSH typically follow the YTM because of the nature of the calculation. SEC yield requires averaging the yield to maturity of the fund’s holdings over the prior 30 days and accounts for fund expenses."

From Vanguard Advisors: July 25, 2022 | Expert Perspective
Unpack the challenges of rising bond-fund yields
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jeffyscott
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Re: Short term TIPS etf compared to short term treasury etf

Post by jeffyscott »

billyt wrote: Thu Sep 22, 2022 8:02 am I believe that the SEC yield is forward looking, as it is based on yield to maturity.
That's generally true, but I don't think it is accurate when looking at the nominal yield for TIPS, because it will be based on the past 30 days "income" from the holdings. While SEC defines that "income" as, essentially the YTM of the holdings, for TIPS the nominal income includes the inflation adjustments. So unlike a nominal bond, that will change drastically from month to month, we had over 1% inflation in July and near 0% in August, that will cause correspondingly large changes in the "income" for TIPS.

These wild swings have been noted many times, such as here: viewtopic.php?p=6880814#p6880814
dbr wrote: Wed Sep 21, 2022 10:43 am I hold SWRSX from Schwab and I noticed the published SEC yield has done exactly what you noted. It has been 12% and it has been 0%.
And so it goes, And so it goes, And so it goes, And so it goes, But where it's goin' no one knows
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vineviz
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Re: Short term TIPS etf compared to short term treasury etf

Post by vineviz »

dagothbob wrote: Wed Sep 21, 2022 11:30 am I'm wondering if it's a good idea to invest in a short term TIPS etf instead of short term treasury etf, for preserving money in the short run. (Let's assume I'm already maxed out on I-bonds and I don't want to deal with actual TIPS from TreasuryDirect.)
IMHO you are way overthinking it.

You are virtually always safe in the assumption that the expected return of short-term TIPS will be the same as the expected return of short-term nominal Treasuries. The only difference is in the risks they address, so the only important question is whether your short-term consumption will be mostly in nominal dollars or real (inflation-adjusted) dollars.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
billyt
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Re: Short term TIPS etf compared to short term treasury etf

Post by billyt »

Thanks for that jeffyscott; still learning!
Kal1981
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Re: Short term TIPS etf compared to short term treasury etf

Post by Kal1981 »

If I want to allocates 20% of a portfolio to fixed income, does it matter if it’s in STIP or AGG in the long term?
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vineviz
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Re: Short term TIPS etf compared to short term treasury etf

Post by vineviz »

Kal1981 wrote: Sun Sep 25, 2022 10:47 am If I want to allocates 20% of a portfolio to fixed income, does it matter if it’s in STIP or AGG in the long term?
Most people with such a low fixed-income allocation have a relatively long investment horizon.

If that's the case for you then your 20% in fixed income might be more appropriately invested in long-term bond fund.

Examples:

Vanguard Long-Term Treasury ETF (VGLT)
iShares Core 10+ Year USD Bond ETF (ILTB)
PIMCO 15+ Year US TIPS ETF (LTPZ)
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
Kal1981
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Re: Short term TIPS etf compared to short term treasury etf

Post by Kal1981 »

vineviz wrote: Sun Sep 25, 2022 10:52 am
Kal1981 wrote: Sun Sep 25, 2022 10:47 am If I want to allocates 20% of a portfolio to fixed income, does it matter if it’s in STIP or AGG in the long term?
Most people with such a low fixed-income allocation have a relatively long investment horizon.

If that's the case for you then your 20% in fixed income might be more appropriately invested in long-term bond fund.

Examples:

Vanguard Long-Term Treasury ETF (VGLT)
iShares Core 10+ Year USD Bond ETF (ILTB)
PIMCO 15+ Year US TIPS ETF (LTPZ)
Thanks!
Turbo29
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Re: Short term TIPS etf compared to short term treasury etf

Post by Turbo29 »

dagothbob wrote: Wed Sep 21, 2022 11:30 am I'm wondering if it's a good idea to invest in a short term TIPS etf instead of short term treasury etf, for preserving money in the short run. (Let's assume I'm already maxed out on I-bonds and I don't want to deal with actual TIPS from TreasuryDirect.) When I look at the total return of a TIPS etf it seems like it should be:

(market price changes due to yield changes) + (yield before inflation adjustment) + (inflation adjustment)

I'm looking at the STIP short term treasury etf.
Sometimes I like to learn by doing. I just recently purchased 10 shares of STIP (~$1000) so I could watch it and see how it behaves.
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