Many investors buy TIPS for the inflation protection but fail to consider the other important risk factors in fixed income. The broad TIPS market had a nominal duration of 7.98 years as of March 19, 2021, and—again, theoretically—no credit risk since the issuer is the U.S. Treasury. It's important for investors considering new or enlarged holdings of TIPS funds or ETFs to decide how they will fund the allocation and how the overall duration or credit risk of their fixed income portfolio might change.
For example, for those with cash on hand who are just interested in inflation protection without significantly altering overall portfolio duration an allocation to short-term TIPS might make sense. A broader TIPS allocation could be suitable for those who are considering funding a TIPS allocation from a portfolio that reflects the broad fixed income market, or from a broad Treasury allocation, and who want to maintain a consistent level of duration. Investors considering funding an allocation to TIPS from other credit sectors like corporate bonds should consider that the credit risk of their portfolio may decline, resulting in long-run return implications.
A TIPS-inclined investor’s decision, then, is whether to use an index fund, ETF, or actively managed fund.
At Vanguard, we have highly experienced TIPS traders, analysts, and portfolio managers across the Fixed Income Group, both on the active and on the index management teams. We also have a dedicated Treasury and Inflation specialist team that is responsible for evaluating active opportunities in this space. The TIPS sector is nuanced, and a fixed income manager with significant depth of experience and insights may be able to extract additional value from this market in the form of relative-value, yield-curve, or active-alpha trades, depending on the mandate of the product.