Related: Using ETFs to Manage Inflation Risks
TIPS are a type of Treasury security that is indexed to inflation as a way to shield investors from the negative effects of inflation. The securities’ par value rises with inflation as measured by the Consumer Price Index while interest rate remains fixed. TIPS also offer investors another layer of diversification as many aggregate bond funds exclude TIPS from their holdings.
“TIPS aren’t always a better bet than non-inflation-protected Treasuries. The current U.S. Treasury yield reflects the market’s expectation for the future inflation. If realized inflation is less than the expectation, Treasuries would offer better real returns than TIPS,” according to Morningstar.
VTIP holds 15 bonds with an average duration of 2.8 years. Duration measures a bond’s sensitivity to changes in interest rates. VTIP has yield to maturity of 1.5%.
For more information on Treasury inflation protected securities, visit our TIPS category.