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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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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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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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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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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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.
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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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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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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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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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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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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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Re: Difference between short-term TIPS funds?

Post by GettingCloser » Fri Feb 21, 2020 1:50 am

Northern Flicker wrote:
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.
The return one gets from a TIPS held to maturity is not affected at all by any changes in the price that that particular TIPS would fetch on the secondary market at any point in time. To illustrate...

A TIPS Parable
Larry, Moe, and Curly all buy $10k of “TIPS” on the same date in 2020. Larry buys individual 10-year TIPS at auction as a ladder rung that he will hold until maturity. Moe buys the same TIPS at auction, but plans to sell them at some point prior to maturity (say, halfway thru, in 2025). Curly buys $10k of a TIPS mutual fund.

In 2023, interest rates spike up, and the price of Larry and Moe’s TIPS on the secondary market drops by 50%. Curly’s TIPS fund price drops by a comparable amount (but not exactly 50%, since the fund holds other issues as well, and the price fluctuates further due to panicked sellers and opportunistic buyers).

At that point:
  • Curly is crying, because his TIPS fund will have to double in price for him to be able to sell and get his “principal” back.
  • Moe is also crying, because he too faces a potential loss of “principal” if he sells in 2025. He feels a bit better, though, when he realizes that he’ll get his “principal” back (plus inflation adjustment) if he keeps it till maturity in 2030.
  • Larry doesn’t care, because he’s totally unaffected. He’ll get his inflation adjusted “principal” back at maturity, no matter what prices do in the interim.

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Re: Difference between short-term TIPS funds?

Post by Angst » Fri Feb 21, 2020 2:02 am

GettingCloser wrote:
Fri Feb 21, 2020 1:50 am
Northern Flicker wrote:
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.
The return one gets from a TIPS held to maturity is not affected at all by any changes in the price that that particular TIPS would fetch on the secondary market at any point in time. To illustrate...

A TIPS Parable
Larry, Moe, and Curly all buy $10k of “TIPS” on the same date in 2020. Larry buys individual 10-year TIPS at auction as a ladder rung that he will hold until maturity. Moe buys the same TIPS at auction, but plans to sell them at some point prior to maturity (say, halfway thru, in 2025). Curly buys $10k of a TIPS mutual fund.

In 2023, interest rates spike up, and the price of Larry and Moe’s TIPS on the secondary market drops by 50%. Curly’s TIPS fund price drops by a comparable amount (but not exactly 50%, since the fund holds other issues as well, and the price fluctuates further due to panicked sellers and opportunistic buyers).

At that point:
  • Curly is crying, because his TIPS fund will have to double in price for him to be able to sell and get his “principal” back.
  • Moe is also crying, because he too faces a potential loss of “principal” if he sells in 2025. He feels a bit better, though, when he realizes that he’ll get his “principal” back (plus inflation adjustment) if he keeps it till maturity in 2030.
  • Larry doesn’t care, because he’s totally unaffected. He’ll get his inflation adjusted “principal” back at maturity, no matter what prices do in the interim.
Hello GettingCloser, welcome to the forum! I'm on-board with you on this. I like how you've presented these different points of view, so often exemplified by different folk at this site. My alter ego is "Larry". I butt heads periodically with a few of the Moe's and Curly's around here. I won't name names though. :D
Last edited by Angst on Fri Feb 21, 2020 2:04 am, edited 1 time in total.

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Re: Difference between short-term TIPS funds?

Post by watchnerd » Fri Feb 21, 2020 2:03 am

GettingCloser wrote:
Fri Feb 21, 2020 1:50 am

The return one gets from a TIPS held to maturity is not affected at all by any changes in the price that that particular TIPS would fetch on the secondary market at any point in time. To illustrate...

A TIPS Parable
Larry, Moe, and Curly all buy $10k of “TIPS” on the same date in 2020. Larry buys individual 10-year TIPS at auction as a ladder rung that he will hold until maturity. Moe buys the same TIPS at auction, but plans to sell them at some point prior to maturity (say, halfway thru, in 2025). Curly buys $10k of a TIPS mutual fund.

In 2023, interest rates spike up, and the price of Larry and Moe’s TIPS on the secondary market drops by 50%. Curly’s TIPS fund price drops by a comparable amount (but not exactly 50%, since the fund holds other issues as well, and the price fluctuates further due to panicked sellers and opportunistic buyers).

At that point:
  • Curly is crying, because his TIPS fund will have to double in price for him to be able to sell and get his “principal” back.
  • Moe is also crying, because he too faces a potential loss of “principal” if he sells in 2025. He feels a bit better, though, when he realizes that he’ll get his “principal” back (plus inflation adjustment) if he keeps it till maturity in 2030.
  • Larry doesn’t care, because he’s totally unaffected. He’ll get his inflation adjusted “principal” back at maturity, no matter what prices do in the interim.

Curly can stop crying, too, once he understands how duration works in a bond fund and what that means for holding time.

P.S. That would be a heck of an interest rate spike to cause bonds to drop by 50%.
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Re: Difference between short-term TIPS funds?

Post by GettingCloser » Fri Feb 21, 2020 8:02 am

watchnerd wrote:
Fri Feb 21, 2020 2:03 am
Curly can stop crying, too, once he understands how duration works in a bond fund and what that means for holding time.
I’m not sure I understand. Are you saying that Curly somehow does *not* lose money, or merely that he comes to terms with the fact that sh*t happens (and understands why it happened in this case)?

Should Curly buy more TIPS funds in the future?

Is he buying pure inflation protection, a complicated placebo, or something in between?

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Re: Difference between short-term TIPS funds?

Post by watchnerd » Fri Feb 21, 2020 9:19 am

GettingCloser wrote:
Fri Feb 21, 2020 8:02 am
watchnerd wrote:
Fri Feb 21, 2020 2:03 am
Curly can stop crying, too, once he understands how duration works in a bond fund and what that means for holding time.
I’m not sure I understand. Are you saying that Curly somehow does *not* lose money, or merely that he comes to terms with the fact that sh*t happens (and understands why it happened in this case)?

Should Curly buy more TIPS funds in the future?

Is he buying pure inflation protection, a complicated placebo, or something in between?
I'm saying holding to maturity applies to bond funds, too. This is why bond funds tell you average maturity and duration.

You can't say the individual bonds don't lose money if held to maturity and not apply the same logic to bond funds.
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Re: Difference between short-term TIPS funds?

Post by joeschmo » Fri Feb 21, 2020 9:29 am

GettingCloser wrote:
Fri Feb 21, 2020 1:50 am
Northern Flicker wrote:
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.
The return one gets from a TIPS held to maturity is not affected at all by any changes in the price that that particular TIPS would fetch on the secondary market at any point in time. To illustrate...

A TIPS Parable
Larry, Moe, and Curly all buy $10k of “TIPS” on the same date in 2020. Larry buys individual 10-year TIPS at auction as a ladder rung that he will hold until maturity. Moe buys the same TIPS at auction, but plans to sell them at some point prior to maturity (say, halfway thru, in 2025). Curly buys $10k of a TIPS mutual fund.

In 2023, interest rates spike up, and the price of Larry and Moe’s TIPS on the secondary market drops by 50%. Curly’s TIPS fund price drops by a comparable amount (but not exactly 50%, since the fund holds other issues as well, and the price fluctuates further due to panicked sellers and opportunistic buyers).

At that point:
  • Curly is crying, because his TIPS fund will have to double in price for him to be able to sell and get his “principal” back.
  • Moe is also crying, because he too faces a potential loss of “principal” if he sells in 2025. He feels a bit better, though, when he realizes that he’ll get his “principal” back (plus inflation adjustment) if he keeps it till maturity in 2030.
  • Larry doesn’t care, because he’s totally unaffected. He’ll get his inflation adjusted “principal” back at maturity, no matter what prices do in the interim.
I imagine Larry’s life sucks a little because he has to manage all those individual TIPS, so probably he cries a little bit every day. If one wants to avoid the daily small flow of tears by buying a fund, does this mean that there is no way to avoid tears when owning a fund? What about a 0-5yr TIPS fund held for 6 years - presumably it’s still subject to speculation from other teary-eyed investors? It seems impossible to avoid misery.

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Re: Difference between short-term TIPS funds?

Post by GettingCloser » Fri Feb 21, 2020 12:23 pm

watchnerd wrote:
Fri Feb 21, 2020 9:19 am
I'm saying holding to maturity applies to bond funds, too. This is why bond funds tell you average maturity and duration.
Holding to maturity does not apply to bond funds. Holding one for a period of time equal to its average maturity is NOT the same thing.

When an individual TIPS matures, your inflation-adjusted principal is deposited into your account, and you're done. Nothing needs to get sold on the secondary market, so daily price fluctuations are completely irrelevant.

There's no analogous concept for bond funds. The only way to get your "principal" back is to sell your shares of the fund, at which point daily price fluctuations are very relevant, and you CAN lose money (you can also MAKE more money than the underlying inflation protection -- you are speculating, after all).

Put another way: what is the maturity date for VTIP? If you buy a TIPS fund whose average maturity is 2.5 years, and you hold it for 2.5 years, its average maturity at the end will be ... 2.5 years. It's sort of like "free beer tomorrow" :sharebeer

You can't say the individual bonds don't lose money if held to maturity and not apply the same logic to bond funds.
Of course I can -- they are fundamentally different things.

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Re: Difference between short-term TIPS funds?

Post by watchnerd » Fri Feb 21, 2020 1:25 pm

GettingCloser wrote:
Fri Feb 21, 2020 12:23 pm

Of course I can -- they are fundamentally different things.
Bond funds are made of individual bonds.

The bonds in the fund mature.

Curly needs to learn how duration relates to interest rate changes and what that means for return of principal over a given time frame.
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Re: Difference between short-term TIPS funds?

Post by watchnerd » Fri Feb 21, 2020 1:27 pm

GettingCloser wrote:
Fri Feb 21, 2020 12:23 pm


Put another way: what is the maturity date for VTIP? If you buy a TIPS fund whose average maturity is 2.5 years, and you hold it for 2.5 years, its average maturity at the end will be ... 2.5 years. It's sort of like "free beer tomorrow" :sharebeer
Please read so you understand better:

https://www.thebalance.com/how-duration ... nds-416907
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joeschmo
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Re: Difference between short-term TIPS funds?

Post by joeschmo » Fri Feb 21, 2020 2:40 pm

What's the practical recommendation based on this? Don't buy anything except individual short-term TIPS? In my fortunate and rare case, I have a couple million dollars planned allocation to VTIP and it seems a little insane to manage individual TIPS....

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Re: Difference between short-term TIPS funds?

Post by Northern Flicker » Fri Feb 21, 2020 3:30 pm

GettingCloser wrote: The return one gets from a TIPS held to maturity is not affected at all by any changes in the price that that particular TIPS would fetch on the secondary market at any point in time. To illustrate...
You’ve not understood my posting. I was not referring to the return at maturity. An illustrative example: if you buy a 30-year TIPS and a year later, real rates rise, the market value of the TIPS will have fallen. This is why the NAV of bond funds fall. The market value of a bond portfolio that you manage yourself fluctuates just like a bond fund NAV (which is just the market value of the portfolio).

What you get from managing the portfolio yourself is predefined points in time where you can withdraw some of the assets at par (when a bond matured). The tradeoff is reduced liquidity (it will cost you to withdraw at other times whereas a bond fund supports daily liquidity) and generally reduced overall return from not employing some return boosting strategies that are used by professional bond portfolio managers.
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Re: Difference between short-term TIPS funds?

Post by Horton » Sat Feb 22, 2020 8:11 am

joeschmo wrote:
Fri Feb 21, 2020 2:40 pm
What's the practical recommendation based on this? Don't buy anything except individual short-term TIPS? In my fortunate and rare case, I have a couple million dollars planned allocation to VTIP and it seems a little insane to manage individual TIPS....
My practical recommendation is to just pick a fund and move on. VTIP is fine. There, you have permission.

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Re: Difference between short-term TIPS funds?

Post by GettingCloser » Sat Feb 22, 2020 10:39 am

joeschmo wrote:
Fri Feb 21, 2020 2:40 pm
What's the practical recommendation based on this? Don't buy anything except individual short-term TIPS? In my fortunate and rare case, I have a couple million dollars planned allocation to VTIP and it seems a little insane to manage individual TIPS....
(side note to Joe: it seems like you're envisioning thousands of purchases of individual $1000 TIPS bonds. That is not the case. If you were so inclined, you could purchase $5M of an individual TIPS issue in a single transaction. Maybe we should be calling them "individual TIPS lots"? Calling them "lots of individual TIPS" would be even more confusing ;-) )


As I started to respond, it dawned on me that the lack of consensus regarding TIPS approaches probably stems from the fact that different people have different underlying objectives wrt TIPS. Perhaps a multi-faceted recommendation is in order:

What TIPS Should I Buy?
If your objective is to protect specific amounts of future purchasing power from being eroded by inflation (such as annual retirement expenses prior to taking social security), your best bet is a ladder of individual TIPS that you'll hold until they mature. Individual TIPS have the following attributes:
  • They are backed by the full faith and credit of the U.S. government.
  • If held to maturity, they are not subject to market risk (i.e. you can't lose your principal if you hold them to maturity). Similarly,
  • If held to maturity, they are not subject to interest rate risk (even if interest rates spike up, you still can't lose your principal if you hold them to maturity).
  • They provide a constant real return (net of inflation), which is determined at purchase time.
  • They also provide DEflation protection -- even if inflation is net negative over a TIPS' lifetime, you'll never receive less than your original principal at maturity (which increases its net real return).
If your objective is to diversify the bond portion of your portfolio against inflation risk, you should consider a TIPS bond fund. TIPS funds have the following attributes:
  • The individual TIPS they hold are still backed by the full faith and credit of the U.S. government.
  • They are somewhat simpler to purchase than individual TIPS (no need to wait for auctions or use the secondary market).
  • They are more liquid than individual TIPS -- it's easier to sell them whenever you wish. However,
  • They are subject to market risk and interest rate risk, so it is possible to lose some of your principal if you sell them at the wrong time.
  • Because their portfolios of TIPS are professionally managed, they may provide a higher return than individual TIPS you buy yourself.
  • They are a good complement to "regular" bond funds (TIPS funds should not be your *only* bond holding).

(edit: clarified wording of DEflation protection bullet point)
(edit: "a specific amount" => "specific amounts")
Last edited by GettingCloser on Sat Feb 22, 2020 2:54 pm, edited 3 times in total.

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Re: Difference between short-term TIPS funds?

Post by watchnerd » Sat Feb 22, 2020 10:51 am

joeschmo wrote:
Fri Feb 21, 2020 2:40 pm
What's the practical recommendation based on this? Don't buy anything except individual short-term TIPS? In my fortunate and rare case, I have a couple million dollars planned allocation to VTIP and it seems a little insane to manage individual TIPS....
I buy short TIPS both individually and with VTIP.

VTIP's duration is only 2.5 years. It's not big risk.
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Re: Difference between short-term TIPS funds?

Post by GettingCloser » Sat Feb 22, 2020 11:03 am

Northern Flicker wrote:
Fri Feb 21, 2020 3:30 pm
GettingCloser wrote: The return one gets from a TIPS held to maturity is not affected at all by any changes in the price that that particular TIPS would fetch on the secondary market at any point in time. To illustrate...
You’ve not understood my posting. I was not referring to the return at maturity.
I understood your posting -- I was just trying to reiterate that return at maturity is the only return that matters for my use case (protecting a specific amount of future purchasing power from being eroded by inflation, via a ladder of individual TIPS held to maturity).

Does it help if I stipulate that individual TIPS are subject to market risk and potential loss of principal when used in the other TIPS use case (diversifying the bond portion of a portfolio against inflation risk, with no specific "cash out" date in mind, so no intention of holding to maturity)?

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Re: Difference between short-term TIPS funds?

Post by rlangford » Sat Feb 22, 2020 11:21 am

Fidelity currently only has 10 maturities of TIPS available to purchase in the secondary market, all with long term maturities. Not long ago you could buy all maturities at Fidelity. It appears that the demand for TIPS has increased to the point where the only way to buy short term TIPS is through a TIPS fund like VTIP or buying them at auction.

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Re: Difference between short-term TIPS funds?

Post by MtnBiker » Sat Feb 22, 2020 12:24 pm

rlangford wrote:
Sat Feb 22, 2020 11:21 am
Fidelity currently only has 10 maturities of TIPS available to purchase in the secondary market, all with long term maturities. Not long ago you could buy all maturities at Fidelity. It appears that the demand for TIPS has increased to the point where the only way to buy short term TIPS is through a TIPS fund like VTIP or buying them at auction.
That doesn't sound right at all. Maybe try again on Monday morning when the market reopens?

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Re: Difference between short-term TIPS funds?

Post by Northern Flicker » Sat Feb 22, 2020 7:41 pm

GettingCloser wrote:
Sat Feb 22, 2020 11:03 am
Northern Flicker wrote:
Fri Feb 21, 2020 3:30 pm
GettingCloser wrote: The return one gets from a TIPS held to maturity is not affected at all by any changes in the price that that particular TIPS would fetch on the secondary market at any point in time. To illustrate...
You’ve not understood my posting. I was not referring to the return at maturity.
I understood your posting -- I was just trying to reiterate that return at maturity is the only return that matters for my use case (protecting a specific amount of future purchasing power from being eroded by inflation, via a ladder of individual TIPS held to maturity).

Does it help if I stipulate that individual TIPS are subject to market risk and potential loss of principal when used in the other TIPS use case (diversifying the bond portion of a portfolio against inflation risk, with no specific "cash out" date in mind, so no intention of holding to maturity)?
TIPS are not issued in the range of maturities for very many rungs of a ladder. You will have to buy a number of them on the secondary market where seasoning of principal from inflation adjustments usually means not being guaranteed of getting 100% of principal back at maturity. And guarantying the principal at specific points in time does not guaranty that your spending requirements will follow suit.
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Re: Difference between short-term TIPS funds?

Post by watchnerd » Sat Feb 22, 2020 8:19 pm

Northern Flicker wrote:
Sat Feb 22, 2020 7:41 pm

TIPS are not issued in the range of maturities for very many rungs of a ladder. You will have to buy a number of them on the secondary market where seasoning of principal from inflation adjustments usually means not being guaranteed of getting 100% of principal back at maturity. And guarantying the principal at specific points in time does not guaranty that your spending requirements will follow suit.
You could do that.

But you can also buy them at auction as they come up over several years, and then you end up with a ladder.

Year 1: Buy 5 Year, 10 Year
Year 2: YR1-5YRTIP is now a 4 year; YR1-10YRTIP is now a 9 year, buy new 5 and 10
Year 3 - 5: rinse and repeat

Once you're 5 years into it, you're on autopilot.
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Re: Difference between short-term TIPS funds?

Post by Northern Flicker » Sat Feb 22, 2020 9:19 pm

So.... you've covered expenses for years 6-15 of the next 15 years. What about other years?
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Re: Difference between short-term TIPS funds?

Post by watchnerd » Sat Feb 22, 2020 11:53 pm

Northern Flicker wrote:
Sat Feb 22, 2020 9:19 pm
So.... you've covered expenses for years 6-15 of the next 15 years. What about other years?
Near term, you have a couple of choices:

1. Invest in VTIP or similar. Horrors!

2. Don't worry about inflation-adjusted securities so much for years 0-5 and just pick short duration bonds or near cash equivalents (CDs, etc.), which respond pretty quickly to interest rate changes.

We happen to keep 2.5 years of living expenses in cash equivalents, which is just below the duration of VTIP.
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Re: Difference between short-term TIPS funds?

Post by rlangford » Sun Feb 23, 2020 9:20 am

MtnBiker wrote:
Sat Feb 22, 2020 12:24 pm
rlangford wrote:
Sat Feb 22, 2020 11:21 am
Fidelity currently only has 10 maturities of TIPS available to purchase in the secondary market, all with long term maturities. Not long ago you could buy all maturities at Fidelity. It appears that the demand for TIPS has increased to the point where the only way to buy short term TIPS is through a TIPS fund like VTIP or buying them at auction.
That doesn't sound right at all. Maybe try again on Monday morning when the market reopens?
It's been the case now for a couple of weeks at Fidelity.

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Re: Difference between short-term TIPS funds?

Post by #Cruncher » Sun Feb 23, 2020 12:05 pm

rlangford wrote:
Sat Feb 22, 2020 11:21 am
Fidelity currently only has 10 maturities of TIPS available to purchase in the secondary market, all with long term maturities.
I suspect this is the case only for online purchasing, and that you can buy any outstanding TIPS if you telephone. According to Friday's WSJ TIPS Quotes only the ten TIPS maturing 2040 - 2049 have a positive yield to maturity. Fidelity probably wants the chance to make sure prospective buyers of a TIPS with a negative yield know they will lose money in constant dollars if the TIPS is held to maturity.

By the way, regarding using the secondary market to construct a TIPS ladder, I've just updated my TIPS Ladder Builder spreadsheet to include the latest issues and prices.

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Re: Difference between short-term TIPS funds?

Post by rlangford » Sun Feb 23, 2020 12:35 pm

#Cruncher wrote:
Sun Feb 23, 2020 12:05 pm
rlangford wrote:
Sat Feb 22, 2020 11:21 am
Fidelity currently only has 10 maturities of TIPS available to purchase in the secondary market, all with long term maturities.
I suspect this is the case only for online purchasing, and that you can buy any outstanding TIPS if you telephone. According to Friday's WSJ TIPS Quotes only the ten TIPS maturing 2040 - 2049 have a positive yield to maturity. Fidelity probably wants the chance to make sure prospective buyers of a TIPS with a negative yield know they will lose money in constant dollars if the TIPS is held to maturity.

By the way, regarding using the secondary market to construct a TIPS ladder, I've just updated my TIPS Ladder Builder spreadsheet to include the latest issues and prices.
I suspect that you are correct that it is only for online purchases. Thanks for the spreadsheet.

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Re: Difference between short-term TIPS funds?

Post by garlandwhizzer » Sun Feb 23, 2020 1:23 pm

joeshmoe wrote:

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?
First of all there wasn't much inflation over the past decade so the TIPS principal adjustment didn't go up much. Second, TIPS are supposed to protect from unexpected inflation. Expected inflation is already priced into the rates nominal Treasuries when they are issued. Over much of the last decade, many investors expected inflation to increase significantly due to aggressive monetary policy in combination with the economic recovery from the Great Recession. Those expectations, like many about about other issues, proved to be wrong. Inflation remained stubbornly low in spite of efforts to stimulate the economy with low rates and robust deficit spending. So paying for unexpected inflation wasn't an optimal strategy. The opposite thing happened, less than expected inflation which juiced nominal bond returns. The important thing to keep in mind is that going forward the same thing could happen again, stubbornly low inflation which is what almost everyone expects now. Or the exact opposite could happen, less likely but possible. It is dirt cheap at present to buy protection from unexpected inflation with ST TIPS and I personally believe it's a rational choice for a portion of the bond portfolio. ST Treasuriy Funds and MMF also provide some degree inflation protection due to their short durations and rapid turnover, but not as much as with ST TIPS. If rates and inflation rise, nominal bond principal values will decline in direct relationship to their duration so you lose less principal value with short duration. Especially if your nominals are intermediate or long term, ST TIPS are nice to have because unexpected inflation is the chief enemy of bond duration.

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