I have written on TIPS earlier for MFO in the Feb issue. Here is the link:
https://www.mutualfundobserver.com/2022/02/thoughts-on-inflation-protection/The
1st tool for inflation protection and the easiest one is Series I bonds. Each American tax payer can buy it for
10K online and 5k in paper through Tax refunds. That is the easy part because you can never lose mark to market money in that product. One doesn't even have deflation risk (I know, an odd think to think about right now) in Series I bonds. You are always protected at a zero inflation floor and get paid more than that if CPI is higher.
But what should we do AFTER I bonds, if anything.
One can always leave money in cash. Cash is always going to protect the notional value, provided, the 8-9% inflation we have witnessed in the last
12 months does not bother the person.
It's understandable if people look for protection against inflation. When you've satiated your I bond capacity and don't want to leave in cash, what are the other tools available.
1. TIPS
2. Commodities?
3. Real Estate?
4. Thoughtfully managed short-end taxable mutual funds?
There are no guaranteed answers but TIPS have a
100% correlation to CPI-U. Do remember that the calculation of CPI in the TIPS accruals is lagged by 3 months.
Complete details on how TIPS work can be seen in this video I produced a few years back:
A great website on TIPS is maintained by David Enna: tipswatch.com
I can tell you why I continue to hold short-dated TIPS.
YTD, the VTIP (Vanguard Short-Term Infl-Prot Secs ETF) is down
1.53% year to date. How should I process that information given the high CPI we have witnessed thus far.
YTD, the price return of VTIP has been -3.8% and the total return has been -
1.5%.
This means, TIP owners have been paid 2.5% in "interest" from CPI. But because of lagged use of CPI and not enough time gone by, this 2.5% is less than 6-7-8-or-9% that might be accrued due to CPI increases when the year is done. Not all of the interest will accrue right away but it will all make its way through the TIPS eventually.
Another question to ask is: what would I have held instead that is Bond like?
1. TIP (7.5 year duration) -8.9% ytd
2. LTPZ (20year duration) - 26% ytd
3. Short Term Treasuries -3.5% ytd
4. Intermediate Term Treasuries -7.7% ytd
5. Long Term Treasuries - 22% ytd
What would have been US Government paper and "safer"? Maybe 3 month T-bills would have been fine. And that's the same as cash.
Once an investor goes outside of the TIPS universe for inflation protection, one opens up a can of unknowns.
Equity REITS -20%,
Commodities and Commodity stocks did great for a while and recently had a 30-50% correction based on what one owned.
Volatility matters for meeting goals. VTIP was the cleanest among the dirty shirts.
If absolute returns is your goal, and it's a good one, in the Fixed Income Taxable bond universe, RiverPark Short Term High Yield Institutional, RPHIX, is UP on the year. David Sherman's been phenomenal in keeping the fund above the surface in 2022.
FPA New Income, apparently Open, but I cant buy it because it shows up Closed due to Schwab not having updated their database, is also long a lot of Floating rate bonds that will help the fund in the future.
I continue to be long VTIP because I believe that even if Fed raising rates further has an impact on Duration and Real Yields, and it hurts VTIP, eventually you get paid through CPI as long as inflation remains sticky. And if inflation comes down, the portfolio would benefit from OTHER assets. *unless we are in stagflation, in which case, God help*
Hope this was helpful.
