Because TIPS strip out the price risk, the theory is that they’d hold their value better.
What are the risks of TIPS?
In short, the risk is that you could buy some TIPS and inflation doesn’t pan out like you expected it might. “If inflation doesn’t pan out,” Caltagirone says, “then you’re stuck with the lower yield.”
If a period of deflation is entered, then it cuts into your yield. The worst-case scenario is deflation; the best-case is stagflation.
What strategies can I use when it comes to TIPS?
Caltagirone says that most investors should think of TIPS as a strategic position – not one necessarily of buy-and-hold, but held for a period of time, such as one, two or three years. Tactically trading TIPS could shortchange investors of their rewards: “The benefits of them get felt out over longer periods of time.”
That’s because, Caltagirone says, inflation is very noisy in the short-term since it’s measured month-to-month. Once that’s all smoothed out, you can see where the overall trajectory is headed.
Where do TIPS fit in with other inflation hedges?
One benefit of TIPS, Caltagirone notes, is that they’re directly linked to inflation by contract. Commodities can be a useful hedge against inflation, but they’re not contractually obligated to deliver on that, so there’s no guarantee. “[Commodities] tend to drive inflation in the short-term, but over the long-term they’re not all that correlated with inflation.”
What TIPS ETFs are available?