The expectation of falling interest rates may seem like the current market may not be conducive to using Treasury inflation-protected securities. However, it’s ideal to maintain constant exposure to TIPS.
Using TIPS has been an ideal solution in the past few years amid aggressive rate hikes by the Federal Reserve. Nonetheless, timing the use of TIPS can be a trying task, so constant exposure is ideal. Moreover, inflation, whether advancing higher or lower, will always remain, so it’s best to stay ready.
“Despite the Federal Reserve’s 2% inflation target, long-term CPI has averaged over 3%,” a Forbes article noted. “The U.S. has generally enjoyed a tame inflation rate since the mid-1980s, but more recently, the aftermath of COVID and some policy decisions surrounding it has sent the 3-year annualized inflation rate to 5.4%.”
Annualized CPI Inflation
Easy Short-Term TIPS Exposure
Given the notion that inflation can have its own peaks and valleys, it’s ideal to maintain a constant position in TIPS. That said, an option to consider is the Vanguard Short-Term Inflation-Protected Securities Index Fund ETF Shares (VTIP). Investors looking for TIPS exposure can opt for individual bonds. But VTIP offers an all-encompassing solution that makes access to this intricate section of the bond market easier.
VTIP seeks to track the Bloomberg U.S. Treasury TIPS 0-5 Years Total Return Index performance. The index is a market capitalization-weighted one that includes all inflation-protected public obligations issued by the U.S. Treasury with remaining maturities of less than five years.
The manager attempts to replicate the target index by investing all, or substantially all, of its assets in the securities that make up the index, holding each security in approximately the same proportion as its weighting in the index.
- Seeks to track an index that measures the performance of inflation-protected public obligations of the U.S. Treasury that have a remaining maturity of less than five years.
- Designed to generate returns more closely correlated with realized inflation over the near term
- Offers investors the potential for less volatility of returns relative to a longer-duration TIPS fund.
- Given its shorter duration, the fund can have less real interest rate risk and lower total returns relative to a longer-duration TIPS fund.
- Invests in bonds backed by the full faith and credit of the federal government and whose principals are adjusted semiannually based on inflation.
- Can provide protection from inflationary surprises or ”unexpected inflation.”
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