TIPS: Inflation-indexed Treasury Bonds
- mitelo
- qwert0904
- radiodude
- Kirk
- arommel88
- bob90245
- Kirk
- arommel88
- Kirk
- Kirk
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» mitelo - Re: List of Inflation Protected Bond Funds
In response to message posted by Kirk:--
Some people keep 10-20% in gold as an inflation hedge. I think this is now the best choice for that purpose. Buy it, hold it, and hope it won't make you big profits since that would be bad news for everything else. TIPS are the new financial "umbrella" insurance policy.
-- posted by mitelo
» qwert0904 - ips
A few days ago I did a little reasearch about inflation protected bonds and what I found and put some small amount was: VIPSX from Vanguard and PCRDX from Pimco (the last also buy commodity futures using tips as colateral to double hedge against inflation as they explain). Just my 2c.-- posted by qwert0904
» radiodude - Re: List of Inflation Protected Bond Funds
In response to message posted by Kirk:Hi Kirk,
ishares is planning on releasing a TIPS ETF in a few months, but this does not help you in the near term.
for more info, see http://www.ishares.com/newsroom/detail.j...
The more I learn about ETF's, the more I like them for both stocks and bonds. Of course, Vanguard will have > 20 ETF's in a few months, so they like them too!
..radiodude.
-- posted by radiodude
» Kirk - Hot TIP for ETF Investors
.Hot TIP for ETF Investors
By Gregg Greenberg
TheStreet.com Staff Reporter
1/13/2005 7:56 AM EST
URL: http://www.thestreet.com/etf/etf/1020310...
Morgan Stanley (MWD:NYSE) has a few TIPS for exchange-traded fund investors.
The investment bank is out this week with a research note highlighting the pros and cons of the iShares Lehman TIPS Bond (TIP:NYSE) ETF, which tracks the well-known Treasury inflation protected securities, or TIPS. The report comes on the heels of rising worries about inflation.
TIPS are designed to protect investors from the erosion of purchasing power that rising inflation can cause. In an inflationary environment, TIPS tend to outperform most traditional fixed-income investments. TIPS pay a semiannual coupon, and their par value is adjusted to account for changes in the consumer price index.
The TIP exchange-traded fund is slightly different from the underlying bonds, however, in that it pays monthly income equal to its earned coupon income plus or minus any changes made to the par value of its holdings as a result of changes in the CPI.
Like all ETFs, the TIP trades very much like a stock, in this case on the NYSE. Options are available to be bought and sold on it as well. The expense ratio for the ETF is 0.20%.
"In light of recent commentary from the Federal Reserve Open Market Committee regarding increased worries about the inflation outlook, we believe it is appropriate to revisit the iShares Lehman TIPS fund," said Paul Mazzilli, ETF strategist at Morgan Stanley.
Prices rose 0.2% in November's CPI report, which was a less threatening pace than the 0.6% spike in October. Nevertheless, November's CPI reading was still 3.5% higher than a year ago, which is likely what prompted the Fed to issue its warning at its last meeting. The December CPI is set for release on Jan. 19.
In addition to the enhanced coupon payment based on the inflationary environment, Mazzilli points out that the TIP ETF should outperform traditional fixed-income investments during periods of rising interest rates.
"Rising interest rates are typically characterized by rising inflation and the protection offered through TIP through higher dividends should enable the performance of TIP to compare favorably," says Mazzilli, who cautions investors that the TIP could also decline if long-term interest rates rise.
Long-term interest rates have been expected to rise since early 2004, as the Fed embarked on its campaign of measured rate increases. Nevertheless, apart from a spike in the spring of 2004, the yield on the benchmark 10-year Treasury bond has stayed 4% and 4.3% since the beginning of 2004. Yields rise as bond prices fall, and vice versa.
Investor awareness in TIPS has grown substantially over the past year as financial advisers have increasingly attempted to prepare their clients for a potential spike in inflation. The increased interest in TIPS has led many analysts, including Mazzilli, to note that the inflation-fighting bonds might potentially be overvalued; this would be a negative for investors interested in diving into the TIP market now.
[Kirk's Editor Comment: This over valuation has had me worried too. I’d max out on iBonds first. I also believe a CD ladder can work just as well or better than TIPS in that if rates remain low or even go lower, you make more. I just looked into a 3,6,9,12 month CD ladder yesterday and you can get 2.2 to 3.0% while a 1 yr TIP is only paying 1.19% plus inflation. As such, I’d not put all my fixed income eggs into a TIPS basket, but use CD ladders and Ibonds for some of the mix.]
"While valuations have improved recently, our interest rate strategists believe 10-year TIPS remain slightly expensive," says Mazzilli. "As of Jan. 6, the implied break-even rate of inflation was 255 basis points for the 10-year TIPS, which is above our current inflation forecast."
The difference between comparable maturity Treasury and TIPS yields is viewed as the break-even inflation rate.
Despite concerns about overvaluation, Mazzilli notes that the TIP can be useful for investors who wish to maintain a position in inflation protected securities without going to the expense of buying individual TIP bonds.
"Buying individual bonds can be quite expensive for investors," says Mazzilli. "And it is often difficult to build and maintain a diversified portfolio of bonds unless considerable resources are allocated to the asset class."
-- posted by Kirk
» arommel88 - Re: Hot TIP for ETF Investors
In response to Hot TIP for ETF Investors posted by Kirk:
More inflationary pressure.
http://biz.yahoo.com/rb/050111/retail_ap...
This is one place to try and ride it out with good liquidity.
http://finance.yahoo.com/q/bc?s=VBISX&t=...
-- posted by arommel88
» bob90245 - Re: Re: Hot TIP for ETF Investors
In response to Re: Hot TIP for ETF Investors posted by arommel88:This is one place to try and ride it out with good liquidity. http://finance.yahoo.com/q/bc?s=VBISX&t=...
A bit volatile for my risk tolerance. 3% yield with NAV +/- 4.5%
-- posted by bob90245
» Kirk - Re: Kirk's CD Ladder Alternative
.In response to Re: Hot TIP for ETF Investors posted by arommel88:
I'm sorry but I don't understand your comment.
VBSIX is only paying 3% and it has rate risk.
The CD ladder I proposed as an alternative will pay about 2.6% for the first three months and work its way up to 3.0% once you have three quarters of rolling the 2,6 and 9 month CDs into a 1YR CD paying 3%.
IF rates are flat for 9 months, THEN that CD ladder will get you to 3.0% with 25% comming due every 3 months. You do pay a bit of a price on liquidity, but most of us have funds parked in fixed income IRAs that we don't plan on using for decades.
I'm not saying to not buy a TIP fund, just I think people have been chasing yield and the falling rates have given the longer duration of TIP funds a nice bit of extra return these past few years. This SHOULD unwind if we are in a mini bond bubble as I suspect. I'd prefer a CD ladder as safer. Since it will fully mature in a year, you lose very little opportunity cost if inflation suddenly jumps and rates go sky high because you just buy new CDs at the higher rates.
If we are not in a bond bubble and you think rates are still going lower, then you want a long duration such as 10 or 30 year TBills or even a strip zero fund so you maximize capital appreciation. I don't recommend those at this time.
-- posted by Kirk
» arommel88 - Re: Re: Kirk's CD Ladder Alternative
In response to Re: Kirk's CD Ladder Alternative posted by Kirk:Actually the current yield is 3.3. I agree there is more risk in nominal terms and volitility Vs CDs. However, if interests rates rise enough to shock a short term bond fund then any of these investments is a loser and it is time to look to put it in defensive equities with good cash flow and/or hard assets etc. because you are getting inflated to death. I will probably wait for the next Fed meeting before doing anything. However I do not see short term rates going too high because the job market is still too soft. Prices will rise but wages will not rise with it. Run away inflation is bad Fed policy, while commodity prices going up just cuts down on consumption. If wages do follow, then we will have a run away train again. If you can go through a full 2 year cycle then you will not get hurt(during the very worst). I am much more negative on Long term rates than cannot take another full point rise with out getting a beating. I just do not want to lose liquidity even for a few months and you have to get the CDs rolling which is really just a slightly tighter cycle. Maybe I will pay for the convenience.
-- posted by arommel88
» Kirk - TIP the ETF vs TIP Funds
.In response to Re: Opposing Opinion: Brinker, I-Bonds and IRAs posted by Chgo:
Is there any advantage to owning the TIP ETF rather than the TIP Funds from Fidelity or Vanguard, other than short term trading?
Good question. I wish I was an expert on TIPS but I’m just learning myself. Hopefully others will chime in if I miss anything or make a mistake.
I think the biggest advantage of any ETF is you can sometimes get a discount to NAV.
I think being able to trade in real time is actually a negative for most people because this encourages trading which usually leads to lower returns. My belief for TIPS is they are best kept in a portfolio as inflation protection where they allow one to have a lower exposure to equities than in the past when the only way to get inflation protection was through equities.
Right now, ETF Connect says TIP returned 8.30% in 2004 and was up 2.63% as of 9/30/03. For the past 1 year, the share price appreciated 5.23% while the NAV only appreciated 5.11% so there is a demand premium, not a discount.
Fidelity says their FINPX fund is paying a base rate of 1.51% which is better than the 1.2% you get for I BONDS. Its one year performance through 9/30/05 was only 4.68% which is probably due to its higher expense ratio but it could also be its choice of blend for a different duration than the TIP ETF.
Maybe a table to compare will give us more light on the issue.
Ticker FINPX TIP
Fund Type Mutual Fund ETF
Annual Expenses 0.63% 0.20%
YTD through 09/30/05 2.15% 2.63%
2004 Return 8.24% 8.30%
1 yr through 9/30/05 4.68% 5.23%
Duration Years 5.4 5.77
Average Maturity Years 10.2 10.42
If I buy in $10,000 increments from Fidelity with a $12 each side of the trade for commissions (assumes you have a reasonable sized account to get that rate), then you are looking at $24 per $10,000 for 0.24% extra expenses. If you buy in $5,000 chunks, then this commission will jump to 0.48% that you will have to amortize over the time you hold the fund. Thus, if you are buying at $10,000 or less increments, it seems that the mutual fund can be cheaper if you want to do any timing and don’t care about getting the absolute best intraday price.
I’d suspect the extra few basis points you can get trading TIP intraday could offset the commissions and make it a wash with the FINPX fund at Fidelity.
As for trading and speculating, the average volume for TIP trading is only around 157K, and it seems to me that some traders could get caught holding these rather than selling, and get hurt.
Good observation. This could work for a method like mine where I trade around a core position. That means I buy when they are going down and testing resistance levels where the BID to ASK spread can work for you rather than against you. Likewise, it can work to your favor when taking profits and others are paying a premium to buy what is going up. As a trading vehicle, I’d think people would look for an ETF that isn’t coupled to inflation since most of the swings in longer term bonds are due to changes in inflation outlook.
A quick look at the charts show TIP has higher swings than FINPX which is probably liquidity related. (Note that the 2004 peak for TIP was nearly an all time high so anyone buying that day is down about 4%. On the other hand, someone buying an I Bond on that same day in 2004 would be up nearly 2 years of I bond interest by now for over a 10% difference. This is why many like I Bonds over TIPS.
<img src=http://stockcharts.com/def/servlet/Sharp...>
<img src=http://stockcharts.com/def/servlet/Sharp...>
What worries me a bit about TIP funds and the ETF is they have a sizeable “demand component” to them. I checked the base rate that Fidelity quotes for their FINPX fund and it was 1.3% for 9/30 but it increased to 1.51% for Friday 10/28 (one of the reasons I bought more). On the TreasuryDirect site, they say
TIPS pay interest every six months. The interest rate is a fixed rate determined at auction. Though the rate is fixed, interest payments vary because the rate is applied to the adjusted principal. Specifically, the amount of each interest payment is determined by multiplying the adjusted principal by one-half the interest rate.When TIPS mature, we pay either the adjusted principal or the original principal, whichever is greater.
I’m not an expert on bonds, especially TIPS, and I still suspect many ETFs were not set up for long term investors, but traders, so I went with Fidelity because I trust them to look out for the small investor.
More on Treasury Inflation Protected Securities Funds
I am going to copy this reply over to our TIPS: Inflation-indexed Treasury Bonds forum for future reference.
As of 10/30/05 the Total Return for "Kirk's Newsletter Portfolio" since 12/31/98 is Up 165% while the NASDAQ is down 5%!!! (my portfolio beta is roughly equal to that of QQQQ.
For 2005, Kirk’s Newsletter is Up 2.0% YTD vs QQQQ down 4.0% YTD vs DJIA down 3.5% YTD vs S&P500 Up 0.2% YTD
-- posted by Kirk
» Kirk - RE: TIP the ETF vs TIP Funds
NEW for 2006: My two recommended newsletter core portfolios can be fully replicated with seven ETFs bought from a discount broker. Details in the next issue!
.
Author: Chgo
Discussion: Honey's Brinker Beehive--Not a Fan Club
Date: October 30, 2005 7:59 AM
Subject: Re: TIP the ETF vs TIP Funds
In response to Re: TIP the ETF vs TIP Funds posted by Kirk:
I think being able to trade in real time is actually a negative for most people because this encourages trading which usually leads to lower returns. My belief for TIPS is they are best kept in a portfolio
I agree. Another reason for the ETF may be for people who are limited to certain fund families in their 401K, but are allowed to purchase stocks/ETF's. (I'm not saying that TIPS are recommended for 401K's or any other specific retirement fund, since I don't know, and that is a hot topic lately, in more ways than one.)
This way, somebody who is limited to only contributing to a 401K can get the value of TIPS in their portfolio by buying the ETF if they do not have access to a fund.
Have a nice day!!
ChgoBob
.
In response to Re: TIP the ETF vs TIP Funds posted by Chgo:
Another reason for the ETF may be for people who are limited to certain fund families in their 401K, but are allowed to purchase stocks/ETF's. This way, somebody who is limited to only contributing to a 401K can get the value of TIPS in their portfolio by buying the ETF if they do not have access to a fund.
Good idea. I’d just want to be really sure about the expenses before I bought. I hate to work really hard to get an extra percent on a fixed income investment then piss half of it away on expenses including the commissions to buy the EFT at a custodian that makes it hard for you to buy low cost funds.
Remember too, one big way to get over the “potential for a loss” is to dollar cost average into the TIP fund. I actually took notice of this fund back in 2004 when it spiked up. I wanted more inflation protection, but I decided to wait until the Fed was close to done rising rates so I’d not suffer a loss. Some people, as the charts I posted show, lost money on TIP funds and many more lost money relative to what I earned in money market funds waiting for the effective fed funds rate to hit 3.93% on Friday. I don’t see the Fed rising rates enough now to give me a loss, so I moved several percent of my portfolio into them from money funds.
I was amazed to hear Brinker speak of TIP funds as a better buy than I Bonds and not mention that anyone buying the funds is exposed to potential losses. Clearly from the charts I posted, many saw a loss. Of course, I like to buy things that are well off highs which is another reason I was a buyer last week (personal money, not my newsletter where I’ve been in I Bonds making a good return for a very large part of the fixed portion of Kirk's Newsletter Portfolio.).
This might be a good book to buy or try to find in a library.
Handbook of Inflation Indexed Bonds by John Brynjolfsson (Editor) & Frank J. Fabozzi (Editor)
Handbook of Inflation Indexed Bonds provides complete coverage of inflation protection bonds beginning with their first U.S. issuance in 1997. Five, in-depth sections detail: strategic asset allocation; mechanics, valuation, and risk monitoring; global environment; issuers; and investors.About the Authors:
Frank J. Fabozzi is a financial consultant, the editor of the Journal of Portfolio Management, and Adjunct Professor of Finance at Yale University’s School of Management.
John Brynjolfsson is the Vice President and Fixed Income Portfolio Manager of PIMCO.
For 2005, "Kirk's Newsletter Explore Portfolio" was Up 13.2% vs. QQQQ up 1.2% vs. DJIA down 0.6% vs. S&P500 Up 4.8%
As of 12/31/05 the Total Return for "Kirk's Newsletter Explore Portfolio" since 12/31/98 is Up 197% while the S&P500 only up 12%!!! & NASDAQ only up 1%!!! (my explore portfolio beta is about 1.5)
What should be quite clear is a “buy and forget” market strategy using the DOW, S&P500 or NASDAQ would have under performed holding money funds over the past seven years while my newsletter “explore” portfolio nearly tripled every dollar invested!
-- posted by Kirk
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