Investors itching to balance their 60/40 split with strong fixed income options might want to look past the Total Return Funds and standard Treasuries for the consistent value found in low-fee TIPS ETFs, according to Bill Gross.
In a commentary published on Advisor Perspectives, Gross shared his concerns regarding the shifting nature of total return strategies and why TIPS appeal in this complicated rising rate, inflationary environment.
“When I say these and other total return bond funds have lost their ‘charter,’ I’m asserting that almost all of these funds have in the last five years become quasi ‘index funds,’” Gross wrote.
With those funds adrift from their initial theses, Gross instead suggests one-to-five-year dated TIPs as breakeven yields of 2% ahead of a quick return to “yesteryear’s inflation” may advantage inflation-protected bonds compared to standard Treasuries or the aforementioned total return funds.
Despite the Fed’s efforts and some indications that the market is beginning to cool, including a slowing housing market, CPI still printed at 8.2% for September, just slightly down from August. Add to that the Federal Reserve Bank of Cleveland forecasting core CPI for October over 0.5% month-on-month as of Wednesday, and TIPS ETFs find their appeal.
Investors considering such a move might find low-fee TIPS ETFs particularly attractive compared to the more active, “index light” funds Gross identified. Those investors on the lookout should take the time to look at the Vanguard Short-Term Inflation-Protected Securities ETF (VTIP) for some TIPS coverage.
VTIP tracks the Bloomberg U.S. Treasury Inflation-Protected Securities 0-5 Years Index, investing in debt with a remaining maturity of fewer than five years and a mix of short-and-medium term duration, giving some protection against rising interest rates. While shorter-dated Treasuries provide slightly lower returns, the safety of US debt guarded from inflation and ongoing price hikes may prove attractive.
Vanguard’s low fees come into play, too, with VTIP charging just four basis points for the trouble. VTIP’s seen an uptick in flows over the last five days, netting inflows this week after weeks of outflows. Combined with performance beating the ETF Database Category Average by 2.71% over the last three months, investors should look to VTIP as a notable option in the ongoing fixed income uncertainty facing the market.
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