Whether inflation turns out to be transitory or not, fixed income investors can stay ahead of inflation with Treasury inflation-protected securities (TIPs), or, more specifically, the Vanguard Short-Term Inflation-Protected Securities Index Fund ETF Shares (VTIP).

With the realization that inflation is running hot, the Federal Reserve is looking to raise rates thrice in 2022. Whether that comes to fruition or not, investors still have to acknowledge that inflation will be a major economic challenge in the new year.

“Strong consumer demand, continuing supply chain troubles and the emergence of the omicron variant of the coronavirus threaten to prolong sharply rising prices well into 2022, potentially making inflation the premier economic challenge of the new year,” a Wall Street Journal report says.

“Prices defied many economists’ expectations in 2021 by rising at the fastest pace in nearly 40 years,” the WSJ article says further. “Everything from rent to the price of used cars to groceries climbed higher as the nation’s economy has recovered from the pandemic.”

Stay a Step Ahead of Inflation

Staying ahead of inflation can be helped by the use of Treasury inflation-protected securities (TIPs). If rates are going to rise in the short-term horizon, debt durations of less than five years can be susceptible, but ETFs like VTIP can help.

VTIP seeks to track the Bloomberg U.S. Treasury Inflation-Protected Securities (TIPS) 0-5 Year Index performance. The index is a market capitalization-weighted index 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.

Highlights of VTIP:

  • 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 and offer 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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