Investor research

Examining TIPS as investors hedge against inflation

June 23, 2022

Observations and tips on TIPS
1. The number of retirement-age investors with direct holdings in TIPS funds increased from the two previous years but remained modest.
With inflation soaring, retirement-age investors in particular added TIPS funds to their portfolios
Investors’ TIPS allocation as a percentage of their fixed income holdings from ages 21 through 90 at the end of 2019, 2020, and 2021. The proportion of investors holding TIPS increased for the years 2019 and 2020 from about 0.5% for younger investors to around 3.5%–4.0% for those who had retired. The proportion of investors holding TIPS increased for 2021 from about 0.5% for younger investors to around 5% for investors who had retired.
2. A much greater number of investors get TIPS exposure indirectly through the autopilot feature in TDFs, a point illustrated in the chart below.
More investors get inflation protection indirectly through TDFs than directly through TIPS
The number of investors from ages 21 through 90 who hold TIPS only, TDFs only, and both TDFs and TIPS. The number of investors who hold TIPS only increased modestly with age to around 60-80 and then decreased slightly. The number of investors who hold TDFs increased significantly with age to around 60-70 and then decreased gradually. The number of investors who hold TIPS and TDFs was very modest across age groups.
3. Many investors may not have optimal levels of TIPS in their portfolios.
Investors tend to be over- or under-allocated to TIPS compared with our TDF glide path
Investors’ TIPS allocation as a percentage of their fixed income holdings from ages 21 through 90. The proportion of TIPS users starts at roughly 35% for young investors and decreases to closer to 25% for older investors. The proportion of TDF users starts at 0%, begins to increase for investors in their 60s, and plateaus for older investors at around 20%. The Vanguard TDF glide path starts at 0%, begins to increase for investors in their 60s, and plateaus at about 25%.

Contributors

Tom De Luca
Paulo Costa
Vanguard Insights

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