Choosing TIPS ETF_Short or Medium Term?

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EvelynTroy
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Choosing TIPS ETF_Short or Medium Term?

Post by EvelynTroy »

Thanks in advance for the communities direction -
I am trying to compare the TIPS ETF's as outlined below. I've read previous posts related to which of these to purchase and found you can get really in the weeds with TIPS - I don't have the background to understand most of it. That said, here are my comparisons -

Choosing Short-term TIPS ETF or Intermediate term TIPS ETF
Short term TIPS ETF = Ishares 0-5 year TIPS - STIP
Intermediate Term TIPS ETF = Schwab U.S. Tips - SCHP


Purchasing one of these solves a couple of issues for me in my Schwab taxable account:
Reinvesting proceeds of a matured CD
Reinvesting accumulated Schwab Cash Account amount
Replacing iShares Ultra Short-Term Bond ETF ICSH - yield of 0.49% - My profit has been so little on this ETF that long-term capital gains tax will be minimal. I’ve held it for two years. Surely I can get more return taking small amount more of risk.
Attending to not adding any additional moving parts to my portfolio - replacing not adding and providing a place for accumulated cash to be invested.
Purchasing a TIPS ETF will maintain my current asset allocation of 60% fixed income / 40% equity. The portfolio will continue to stay in balance.
The risk of a TIPS ETF should stay true to the idea of not taking risk on the fixed income side of the portfolio.
I do not envision needing the funds anytime in the next few years that would be invested in a TIPS ETF.
Even though I do not want to take risk on the fixed income side of the portfolio, I do want to gain some reasonable amount of return.
I can't add any funds to the tax-sheltered (IRA) portfolio.


DURATION -
STIP = 2.64 years
SCHP = 7.5 years
Given STIP’s shorter duration, the fund can be expected to have less real interest rate risk, but also lower total returns relative to a longer-duration TIPS fund.


EXPENSE RATIO - Both 0.05%
YIELD - 10/19/21 - It seems like the short-term TIPS should be earning less than the intermediate term TIPS?
STIP = 3.97%
SCHP = 3.54%

The two track different indexes:
STIP tracks = Bloomberg U.S. Treasury Inflation-Protected Securities (TIPS) 0-5 Years Index (Series-L).
SCHP tracks - Bloomberg Barclays US Treasury Inflation-Linked Bond Index (Series-L)SM

Thoughts please on why one should be purchased over the other. I'm leaning towards the short-term STIP - the share prices should fluctuate considerably less as a result of market interest rates.

Evelyn
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JoMoney
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Re: Choosing TIPS ETF_Short or Medium Term?

Post by JoMoney »

FWIW, when selecting bonds/bond-funds I like to try and envision what a conservative idea of my need of the money might be, and would try to keep the maturities something around the time frame of my need of the money. A quality bond offers good assurances that the borrower will pay back the money at a certain schedule, to the extent that I keep an allocation of "safe" money it makes no sense to me to have it in bonds with a maturity farther out then I might need it - yes, if the bonds are marketable they can be sold to someone else to raise cash, and there's a chance I might eek out a little extra by pushing out the maturity/duration, but it could also work against me - there's no guarantees that it won't be at a loss if I can't keep my end of the bond to maturity. It's just not the type of risk I'm willing to take with that bucket/allocation of money.

So my answer to your question, is "it depends" (which is the answer to every question)... and for me the big factor depends on what the time horizon is I think I might have need of the money. :wink:
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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Re: Choosing TIPS ETF_Short or Medium Term?

Post by typical.investor »

EvelynTroy wrote: Wed Oct 20, 2021 8:16 am
DURATION -
STIP = 2.64 years
SCHP = 7.5 years
Given STIP’s shorter duration, the fund can be expected to have less real interest rate risk, but also lower total returns relative to a longer-duration TIPS fund.

Thoughts please on why one should be purchased over the other. I'm leaning towards the short-term STIP - the share prices should fluctuate considerably less as a result of market interest rates.
How long will you hold it?

By the way, over the life of STIP Jan 2011 - Sep 2021, portfolio visualizer shows:

CAGR
STIP 2.01%
SCHP 3.77%

It also shows a $10,000 investment over that time showing real returns of:

STIP -$109
SCHP $1,890

Volatility was:

STIP 1.85%
SCHP 4.35%

Notice too in the 2013 taper tantrum that STIP lost 1.75% while SCHP lost 8.9%. Of course, even after those losses SCHP has a $348 gain at the end of the year on the $10k while STIP was showing a $144 loss.

I'd only use STIP for immediate spending needs.


https://www.portfoliovisualizer.com/bac ... ion2_2=100
Last edited by typical.investor on Wed Oct 20, 2021 8:54 am, edited 1 time in total.
dbr
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Re: Choosing TIPS ETF_Short or Medium Term?

Post by dbr »

JoMoney wrote: Wed Oct 20, 2021 8:37 am FWIW, when selecting bonds/bond-funds I like to try and envision what a conservative idea of my need of the money might be, and would try to keep the maturities something around the time frame of my need of the money. A quality bond offers good assurances that the borrower will pay back the money at a certain schedule, to the extent that I keep an allocation of "safe" money it makes no sense to me to have it in bonds with a maturity farther out then I might need it - yes, if the bonds are marketable they can be sold to someone else to raise cash, and there's a chance I might eek out a little extra by pushing out the maturity/duration, but it could also work against me - there's no guarantees that it won't be at a loss if I can't keep my end of the bond to maturity. It's just not the type of risk I'm willing to take with that bucket/allocation of money.

So my answer to your question, is "it depends" (which is the answer to every question)... and for me the big factor depends on what the time horizon is I think I might have need of the money. :wink:
Yes, what is the money fo? A long term investor holding stocks and bonds should probably hold intermediate bond funds, perhaps for some people even longer, and stay there for the long run. You should be looking at the long run asset allocation plan more than "what to do with X money?"

If you expect to take that money for some purpose soon, then the interest rate risk might be a consideration.

I don't think "take risk in stocks rather than bonds" meaning your bonds should all be short is a helpful mantra. Intermediate TIPS are hardly very risky relative to the total portfolio risk. Anyway if there is a concern make a small adjustment to the stock/bond allocation.

Disclaimer: My bond allocation the last 20 years has been half intermediate TIPS fund and half intermediate Treasuries fund.
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EvelynTroy
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Re: Choosing TIPS ETF_Short or Medium Term?

Post by EvelynTroy »

Thank you JoMoney and Dbr for the considered replies - very helpful.
My situation - retired 7 years and to date I have not needed to withdraw funds from my portfolio for any day to day living expenses, or big purchases like a car, home repair, travel etc. My expenses have been covered because of no debt and two pensions plus social security, low cost of living area.
I have no dependents, or heirs to provide for or leave a legacy for at my death. Withdrawal of my yearly RMD is required - so far have reinvested that amount.

That said, your never know when something catastrophic might happen and I will be required to withdraw funds from my portfolio.
The above means I have no specific purpose for the money, nor use in the next say 5-7 years. Difficult to project though.

From your advice I'm thinking the interest rate risk for me is not that great.
I wanted to note: "take risk in stocks rather than bonds" meaning your bonds should all be short is a helpful mantra. I agree with this. My fixed income is a combination of SCHZ - Schwab US Aggregate Bond ETF (intermediate term bonds), ICSH - i-Shares Ultra Short-term Bond ETF, CD's that are maturing over the next 3 years, and Multi-year Guaranteed Annuities (MYGA).
Evelyn
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EvelynTroy
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Re: Choosing TIPS ETF_Short or Medium Term?

Post by EvelynTroy »

Thanks typical.investor - the portfolio visualizer information is helpful, plus your comment about the taper.
I was looking at -
It also shows a $10,000 investment over that time showing real returns of:

STIP -$109
SCHP $1,890
I can't seem to locate these figures on the portfolio visualizer report? Or is this something you calculated?
Thanks.
Evelyn
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Re: Choosing TIPS ETF_Short or Medium Term?

Post by nisiprius »

It's my personal feeling that inflation is a medium-to-long-term problem and that you need medium-to-long-term protection.

In the short term, investors know what inflation is and can roughly guess what it will be like in the next year or so... and if they are wrong, two years of inflation being 5% more than they expected means they will end up with 10% less buying power than they had counted on. Not great but not a catastrophe. During the last big period of inflation, it was uncomfortable and unsettling because bank interest rates and salaries and so forth lagged inflation, but they did go up with inflation.

The real problem comes when you have a normal yield curve, and you'd like to take advantage of higher interest rates being paid on ten- or twenty-year bonds, but you are worried about how much unexpected inflation might occur over that long a period of time.

So I honestly don't see the point of short-term TIPS because short-term bond and cashlike investments will take care of themselves well enough--maybe not optimally, but I'm "a satisficer, not an optimizer." So I hold an average-intermediate-term TIPS fund just as I hold an average-intermediate-term nominal bond fund.

Much shorter than intermediate and you're down on the short end of the yield curve and might almost as well be in cash.

Also, I'm "a satisficer, not an optimizer" so I don't do any continuous tuning based on yield curve and inflation changes. I don't care if someone else is able do so and make a larger number of dollars than me. I just want to salt away money in something that doesn't fluctuate too much, and that won't get savaged too badly if inflation suddenly heats up and stays up.
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Re: Choosing TIPS ETF_Short or Medium Term?

Post by typical.investor »

EvelynTroy wrote: Wed Oct 20, 2021 9:46 am Thanks typical.investor - the portfolio visualizer information is helpful, plus your comment about the taper.
I was looking at -
It also shows a $10,000 investment over that time showing real returns of:

STIP -$109
SCHP $1,890
I can't seem to locate these figures on the portfolio visualizer report? Or is this something you calculated?
Thanks.
Evelyn
If you look at the Portfolio Growth chart under the returns, there is an inflation adjusted checkbox. Select that and the chart will adjust to show inflation adjusted returns.
Topic Author
EvelynTroy
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Re: Choosing TIPS ETF_Short or Medium Term?

Post by EvelynTroy »

typical.investor wrote: Wed Oct 20, 2021 9:59 am
EvelynTroy wrote: Wed Oct 20, 2021 9:46 am Thanks typical.investor - the portfolio visualizer information is helpful, plus your comment about the taper.
I was looking at -
It also shows a $10,000 investment over that time showing real returns of:

STIP -$109
SCHP $1,890
I can't seem to locate these figures on the portfolio visualizer report? Or is this something you calculated?
Thanks.
Evelyn
If you look at the Portfolio Growth chart under the returns, there is an inflation adjusted checkbox. Select that and the chart will adjust to show inflation adjusted returns.
Thanks. I see it now Handy feature. Evelyn
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EvelynTroy
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Re: Choosing TIPS ETF_Short or Medium Term?

Post by EvelynTroy »

nisiprius wrote: Wed Oct 20, 2021 9:48 am It's my personal feeling that inflation is a medium-to-long-term problem and that you need medium-to-long-term protection.

In the short term, investors know what inflation is and can roughly guess what it will be like in the next year or so... and if they are wrong, two years of inflation being 5% more than they expected means they will end up with 10% less buying power than they had counted on. Not great but not a catastrophe. During the last big period of inflation, it was uncomfortable and unsettling because bank interest rates and salaries and so forth lagged inflation, but they did go up with inflation.

The real problem comes when you have a normal yield curve, and you'd like to take advantage of higher interest rates being paid on ten- or twenty-year bonds, but you are worried about how much unexpected inflation might occur over that long a period of time.

So I honestly don't see the point of short-term TIPS because short-term bond and cashlike investments will take care of themselves well enough--maybe not optimally, but I'm "a satisficer, not an optimizer." So I hold an average-intermediate-term TIPS fund just as I hold an average-intermediate-term nominal bond fund.

Much shorter than intermediate and you're down on the short end of the yield curve and might almost as well be in cash.

Also, I'm "a satisficer, not an optimizer" so I don't do any continuous tuning based on yield curve and inflation changes. I don't care if someone else is able do so and make a larger number of dollars than me. I just want to salt away money in something that doesn't fluctuate too much, and that won't get savaged too badly if inflation suddenly heats up and stays up.
Thanks for the reply. In terms of using the money, or purpose of the money - this is exactly what I was trying to say, didn't have the words -
I just want to salt away money in something that doesn't fluctuate too much, and that won't get savaged too badly if inflation suddenly heats up and stays up.
I understand exactly what you are explaining. Therefore, I decided to invest in SCHP - Schwab's intermediate ETF.
Thanks Nisi, and everyone.
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Re: Choosing TIPS ETF_Short or Medium Term?

Post by #Cruncher »

EvelynTroy wrote: Wed Oct 20, 2021 8:16 amChoosing Short-term TIPS ETF or Intermediate term TIPS ETF
Short term TIPS ETF = Ishares 0-5 year TIPS - STIP
Intermediate Term TIPS ETF = Schwab U.S. Tips - SCHP

...
YIELD - 10/19/21 - It seems like the short-term TIPS should be earning less than the intermediate term TIPS?
STIP = 3.97% [iShares 0-5 Year TIPS Bond ETF]
SCHP = 3.54% [Schwab U.S. TIPS ETF]
I'm not sure exactly how iShares and Schwab are calculating these yields, but I suspect they include some measure of past inflation. I assume this is done in an attempt to make the yields comparable to those of non-inflation-indexed bond funds. However, there are two serious problems with this:
  • If the past inflation is short term (e.g., over the last month) it can make the yields quite volatile.
  • Past inflation is often a poor predictor of future inflation.
Better, in my opinion, is to exclude any measure of inflation and report only the intrinsic yield (aka the "real" yield) of the TIPS the funds hold. Since there are relatively few TIPS outstanding, we can easily weight the intrinsic yields of the individual TIPS ourselves. Doing this with today's WSJ TIPS Quotes we get the following averages for the indexes which each of the two funds follows: [1]
  • -2.50% : STIP : 0 - 5 years [2]
  • -1.48% : SCHP : 1+ years
Thus, your supposition that STIP should yield less than SCHP is correct.

nisiprius wrote: Wed Oct 20, 2021 9:48 amIt's my personal feeling that inflation is a medium-to-long-term problem and that you need medium-to-long-term protection. ... So I hold an average-intermediate-term TIPS fund ...
I agree that inflation is mostly a long term problem. But that doesn't mean one must hold a longer term TIPS fund to protect against it. There are good reasons to prefer a TIPS fund with longer maturities -- like SCHP -- than one with only shorter term holdings -- like STIP. But inflation protection is not one of them. If one holds both funds for the same period, they will provide equal inflation protection.

  1. Here is how I determine these weighted averages along with those for three other TIPS indexes: "1 - 5", "1 - 10", and "15+". (The "Mkt Val" column in the table is the market value in $ millions from the "Weight" sheet of the 9/30/2021 update to my YTM / Duration Calculator Excel workbook.)

    Code: Select all

      5                              Index --->     0-5       1-5       1-10         1+      15+   <===
      6  10/20/2021 <--- As of        From --->  10/20/21  10/20/22   10/20/22   10/20/22 10/20/36
      7                                 To --->  10/20/26  10/20/26   10/20/31   10/20/51 10/20/51
      8                   Sum market value --->   889,579   738,917  1,361,085  1,728,282  355,943
      9             Weighted average yield --->    -2.50%    -2.22%     -1.78%     -1.48%   -0.35% <===
            Matures   Coupon  Mkt Val     Yield   ---- Percent of Market Value (adds to 100%) ----

    Code: Select all

     10   1/15/2022   0.125%   50,184   -4.251%    5.641%                                         
     11   4/15/2022   0.125%   50,603   -3.745%    5.688%                                         
     12   7/15/2022   0.125%   49,875   -3.684%    5.607%
                                   
     13   1/15/2023   0.125%   50,159   -2.918%    5.639%    6.788%     3.685%     2.902%         
     14   4/15/2023   0.625%   54,128   -2.756%    6.085%    7.325%     3.977%     3.132%         
     15   7/15/2023   0.375%   50,698   -2.896%    5.699%    6.861%     3.725%     2.933%         
     16   1/15/2024   0.625%   51,224   -2.419%    5.758%    6.932%     3.763%     2.964%         
     17   4/15/2024   0.500%   37,271   -2.265%    4.190%    5.044%     2.738%     2.157%         
     18   7/15/2024   0.125%   50,357   -2.406%    5.661%    6.815%     3.700%     2.914%         
     19  10/15/2024   0.125%   40,088   -2.253%    4.506%    5.425%     2.945%     2.320%         
     20   1/15/2025   2.375%   46,573   -2.091%    5.235%    6.303%     3.422%     2.695%         
     21   1/15/2025   0.250%   50,817   -2.067%    5.712%    6.877%     3.734%     2.940%         
     22   4/15/2025   0.125%   40,324   -1.979%    4.533%    5.457%     2.963%     2.333%         
     23   7/15/2025   0.375%   51,521   -2.044%    5.792%    6.973%     3.785%     2.981%         
     24  10/15/2025   0.125%   39,058   -1.931%    4.391%    5.286%     2.870%     2.260%         
     25   1/15/2026   2.000%   32,101   -1.800%    3.609%    4.344%     2.358%     1.857%         
     26   1/15/2026   0.625%   53,833   -1.783%    6.052%    7.285%     3.955%     3.115%         
     27   4/15/2026   0.125%   44,964   -1.717%    5.054%    6.085%     3.304%     2.602%         
     28   7/15/2026   0.125%   45,802   -1.764%    5.149%    6.198%     3.365%     2.650%
        
     29   1/15/2027   2.375%   27,152   -1.606%                         1.995%     1.571%         
     30   1/15/2027   0.375%   48,041   -1.584%                         3.530%     2.780%         
     31   7/15/2027   0.375%   45,851   -1.549%                         3.369%     2.653%         
     32   1/15/2028   1.750%   24,526   -1.395%                         1.802%     1.419%         
     33   1/15/2028   0.500%   48,122   -1.375%                         3.536%     2.784%         
     34   4/15/2028   3.625%   37,924   -1.345%                         2.786%     2.194%         
     35   7/15/2028   0.750%   45,680   -1.341%                         3.356%     2.643%         
     36   1/15/2029   2.500%   23,053   -1.240%                         1.694%     1.334%         
     37   1/15/2029   0.875%   45,187   -1.225%                         3.320%     2.615%         
     38   4/15/2029   3.875%   45,692   -1.199%                         3.357%     2.644%         
     39   7/15/2029   0.250%   47,260   -1.202%                         3.472%     2.734%         
     40   1/15/2030   0.125%   47,870   -1.087%                         3.517%     2.770%         
     41   7/15/2030   0.125%   50,389   -1.072%                         3.702%     2.916%         
     42   1/15/2031   0.125%   49,878   -0.966%                         3.665%     2.886%         
     43   7/15/2031   0.125%   35,543   -0.950%                         2.611%     2.057%
     
     44   4/15/2032   3.375%   11,254   -0.913%                                    0.651%
        
     45   2/15/2040   2.125%   28,469   -0.513%                                    1.647%   7.998%
     46   2/15/2041   2.125%   44,946   -0.471%                                    2.601%  12.627%
     47   2/15/2042   0.750%   33,968   -0.385%                                    1.965%   9.543%
     48   2/15/2043   0.625%   32,466   -0.338%                                    1.879%   9.121%
     49   2/15/2044   1.375%   36,951   -0.333%                                    2.138%  10.381%
     50   2/15/2045   0.750%   32,714   -0.291%                                    1.893%   9.191%
     51   2/15/2046   1.000%   30,478   -0.294%                                    1.764%   8.563%
     52   2/15/2047   0.875%   27,036   -0.296%                                    1.564%   7.596%
     53   2/15/2048   1.000%   27,401   -0.293%                                    1.585%   7.698%
     54   2/15/2049   1.000%   22,288   -0.294%                                    1.290%   6.262%
     55   2/15/2050   0.250%   18,609   -0.274%                                    1.077%   5.228%
     56   2/15/2051   0.125%   20,615   -0.285%                                    1.193%   5.792%
  2. As explained in footnote 2 at the bottom of this post, Re: Consistent Yield & Duration to Help Choose TIPS Fund, I think it's better to use the yield of the "1 - 5" index (-2.22% in this case) as a predictor for funds like STIP that follow the "0 - 5" index.
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Re: Choosing TIPS ETF_Short or Medium Term?

Post by hudson »

EvelynTroy,
Some folks use the longer TIPS ETF LTPZ.
Vineviz on using TIPS...viewtopic.php?t=318412
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