TIPs - VG Inflation-Protected Secs VAIPX/VIPSX/VTAPX/VTIP

[chang]

Does anyone own TIPs? Whenever I have looked into these, I have found mostly reasons to avoid them. Yet, they have pretty much gone up in a straight line for the last two years. Wondering if this would make a good complement to VUSFX. They might go flat, but could they suffer a major decline?

[Chahta]

Don't own them but the thought has passed my mind. Reading about them, inflation causes the yield and value of the bonds to rise. Deflation does the opposite. So yes they could decline. Reviewing the distributions of VTAPX shows they are erratic. I am guessing due to older TIPS maturing and the recent spike in inflation. My thought is that one must buy quite a bit to have an effect on a portfolio for inflation protection. I don't see a 10% purchase doing more than protecting that 10%.

I was curious about inflation so I looked back. Core inflation has been close to 2% since 2016 with the exception of 2020 closer to 1%. 

Hope yogibearbull has some insight.

[chang]

Here is a typical negative article:

www.forbes.com/sites/vineerbhansali/2021/03/03/a-tip-to-the-wise-dont-look-at-tips-to-protect-against-inflation-from-here/?sh=17ff99fb21fb


"So where does this leave investors? In my opinion, buying a TIPS bond with negative real yield is betting on actual inflation rising by a lot. If inflation got to say, 3%, the nominal yield on a TIPS security will still be lower than 2% at these levels of real yields. On the other hand, if actual inflation were accompanied with growth in the economy, real yields would have to rise, resulting in losses from negative returns on prices. If inflation were to rise, but growth did not rise (“stagflation”), most investors would probably want more price return on assets than a measly couple of percent from TIPS. In other words, heads TIPS lose, tails TIPS lose – unless the Fed and indexers keep buying them at lower and lower yields, which of course they can."

[yogibearbull]

TIPS are sensitive to real-rates (negative now), and have higher duration (vs comparable Treasuries), so they will suffer if real rates rise.

Unlike individual TIPS, TIPS-funds have to distribute inflation-adjustment annually, so distributions can be uneven.

If one has to buy TIPS-funds, stick to ST-TIPS-funds to reduce rate sensitivity. Inflation-adjustment is the same whether ST or IT TIPS.

[roi2020]

I don't currently own any TIPS but I've previously considered adding a small position to my portfolio.
What are your thoughts regarding PIMCO Real Return Instl (PRRIX)?
This is not a typical TIPs fund as it can invest in foreign inflation-linked bonds and up to 20% in corporate, securitized, or emerging-market assets.

[yogibearbull]

Well, PRRIX is IT-TIPS and leveraged via derivatives. It does include more than just the US TIPS. Anyway, it is not in the direction of ST-TIPS.

[Chahta]

Is 5-10% of a portfolio in tips really protecting any more than that 5-10 against inflation?

[chang]

Oct 11, 2021 23:34:21 GMT Chahta said:

Is 5-10% of a portfolio in tips really protecting any more than that 5-10 against inflation?

Well the equity allocation doesn't need protection. Companies will raises the price of goods and services to keep up with inflation in the costs of raw materials, energy, etc. and as an owner of the infinite profit stream of the company, you will be compensated accordingly. I gather TIPs are intended to aid the FI component of your allocation when yields are sub-inflation. But every deep-dive into TIPs I see seems to suggest that the deck is stacked against them.

[bf22]

I put about 4% of PV into VTIP last year. I shifted this from other bond holdings. So far, so good.
But I don't consider this a long term holding. Once inflation levels, I'll probably be out.

[Chahta]

Reading around the internet about how much in TIPS to own, there is no consensus and the amount is all over the place. Thinking about it leads me to believe the amount to own depends on your portfolio size and how much you need to withdraw; it comes down to dollars needed to live. Large portfolios withdrawing 2% a year have more ability to raise withdrawals than a small portfolio at 4%. A marginal size 40/60 portfolio may need 50-100% TIPS for the FI portion. For me I do not see a need for more than 5% TIPS right now (if so inclined), unless they are bought to increase portfolio value. My spending is under control and not burdensome in excess of SS, all from my taxable account only.

Christine Benz who provides free advisor services has 10-12% TIPS recommended. I think she is a good reference since she speaks to the average investor.

Life is full of risk and sometimes it needs to be riskier to survive. Investing with CEFs generating excess cash to needs may be required. Or actually calculated spend-down could make sense, which is still risky. Surviving comfortably is the benefit for those that did the saving. Heck with heirs.

[roi2020]

FWIW, M* publishes Lifetime Allocation Indexes.
The TIPS allocation varies depending on the profile (aggressive, moderate, conservative) and the target retirement year.

Bond / TIPS allocations (values are discrete) for the moderate profile are listed below.

2045 -   9.55% / 0.41%

2040 - 14.35% / 1.30%

2035 - 21.72% / 3.15%

2030 - 29.20% / 6.08%

2025 - 34.36% / 9.67%

2020 - 36.62% / 13.46%

2015 - 37.00% / 17.39%

2010 - 36.00% / 21.40%

2005 - 33.73% / 25.24%

2000 - 33.89% / 25.36%

Data as of June 2020

[chang]

While on the subject, are there any good TIPs closed end funds trading at a discount? In principle, such a CEF could offer a discount-boosting yield, and use leverage to increase the relative amount of inflation protection obtained from a given PV allocation. I would be concerned about expense ratio eating into the yield, as well as typical CEF volatility. But options would be interesting to examine.

[yogibearbull]

TIPS CEFs WIA, WIW, seekingalpha.com/article/275820-using-cefs-to-buy-tips-at-a-discount

Bill Gates' Cascade Investment LLC is a big investor in WIW but it has been selling some recently. fintel.io/so/us/wiw/cascade-investment

[chang]

Thanks YBB. I cannot open the SA article (not a paid subscriber). According to M* both funds have similar leverage, discounts, credit quality, composition, etc. so it's not clear what distinguishes them. Their record are similar. WIW is a little over twice the size of WIA.

Maybe most important: WIW's average volume is 100,000, while WIA's is 28,100. That's only $390,000 traded in a day — way below the liquidity I would require.

[yogibearbull]

chang , while both are similar, WIW has broader mandate while WIA is more US centric. The US came late to TIPS, so they have existed longer elsewhere. I read once (no link) that Chinese insisted in late-1990s that the US also issue TIPS for Chinese diversification purposes and Treasury Secretary Rubin at the time complied - the US-China relations were different at that time. www.treasurydirect.gov/indiv/research/history/histtime/histtime_tips.htm

Excerpts from SA,

"WIW: Western Asset/Claymore Inflation-Linked Opportunities and Income Fund.
Invests at least 80% of its managed assets in inflation-linked securities.
May invest up to 40% in below investment grade securities.
May invest up to 100% of the portfolio in non-US dollar inflation-linked securities.

WIA: Western Asset/Claymore Inflation-Linked Securities and Income Fund.
Invests at least 80% of its managed assets in inflation-linked securities.
Must invest at 60% in US TIPS.
May invest up to 40% in non-US inflation-linked securities. No more than 20% of its non-US dollar exposure may be unhedged.
Will not invest in below investment grade at time of purchase.

Both funds use a hedging strategy to help limit risk and volatility. They are particularly focused on hedging high-volatility market events such as employment release dates, where they attempt to achieve a relatively stable net asset value.

Although their mandates are quite different, at the present time the portfolios of WIW and WIA are actually quite similar. Both funds are primarily invested in U.S. TIPS. As of April 30, investments in U.S. TIPS were 90.45% for WIA and 86.18% for WIW...."