Our strategists’ research confirmed what they had expected—that Vanguard’s retail clients with taxable or IRA accounts had increased their direct investment in TIPS funds in 2021. “At a granular level, the data showed that investors’ holdings directly through TIPS funds increased substantially in 2021 compared with before the inflationary shock in 2019 and 2020,” De Luca said.

At the same time, investors’ overall allocation to TIPS, which comes largely through target-date funds (TDFs), was about the same as before. “Despite the increase in the direct holdings of TIPS funds, most investors with TIPS exposure still get it through TDFs, and that number didn’t change much. And on average, investors’ TIPS allocations still fell short of the levels suggested by Vanguard’s TDF glide path.”

(Note that while a glide path is a reasonable place to start, it’s based solely on age and not on other factors important to investors, such as investment objectives, personal risk tolerance, time horizon, or other inflation-fighting assets they may hold.) 

Here are the key findings of the research: 

For that age category (62 and older), the percentage of TIPS holders climbed to a range of 4%–5% in 2021 from levels closer to 3%–4% in the two previous years, presumably as investors sought to offset the potential loss of purchasing power on the interest income from nominal bonds, which tend to make up a substantial portion of their portfolios.

Having a TIPS allocation in place before inflation rises is key. Inflation expectations are factored into the price of both nominal Treasuries and TIPS, so the value of holding TIPS in a portfolio is largely for the protection they offer from unexpected increases in inflation.

“The modest change in investors’ overall allocation to TIPS in 2021 suggests they do not see inflation as a long-term concern,” Costa said, “but that could change as the inflation shock unfolds. It’s something we will continue monitoring closely.”  

Many of these funds (which include Vanguard TDFs and those of other TDF providers held in Vanguard client accounts) add TIPS as investors age, which is consistent with life-cycle models of investing.

Naturally, investors get higher allocations to TIPS by investing directly in TIPS funds. However, more Vanguard clients get exposure to TIPS in their portfolios through TDFs—which happen to include inflation protection but probably were not purchased only for that express purpose.

The chart below suggests that investors who hold TIPS directly in their portfolios generally hold similar allocations, regardless of age. Older investors in this category have an allocation to TIPS as a percentage of fixed income securities in their portfolios that falls roughly in line with the level targeted by Vanguard’s TDF glide path, while investors in their 50s appear to have an overweight exposure.

TDF investors, on the other hand, see their exposure to TIPS increase with age. Those aged 62 and above would therefore have had inflation protection in place before the recent surge in prices made the need for it abundantly clear.

The level of inflation protection in those same investors’ portfolios nevertheless is below the level targeted by Vanguard’s TDF glide path. Owning investments in addition to TDFs that do not carry inflation protection is a likely cause of the shortfall, underscoring how important it is for investors to look at all their holdings as one investment portfolio.