Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
TIPs Fund Tracking Error
Old 07-31-2010, 03:10 PM   #1
Thinks s/he gets paid by the post
kyounge1956's Avatar
 
Join Date: Sep 2008
Posts: 2,171
TIPs Fund Tracking Error

Part of my Roth IRA is in a TIPs ETF. I have recently been thinking of switching over to VIPSX, so I can automatically direct my monthly contributions into that fundóI can't set up auto-purchase of ETFs at my Roth custodian. Before doing so, I wanted to check and see whether VIPSX (which is not, strictly speaking, an index fund) tracks the index as closely as the ETF, which has matching the index as its objective. It took a while, but I eventually found an online chart (at Morningstar) which displays the index along with the fund performance. (see belowóchart shows the last 3 years). It doesn't look like there is much difference between TIP (the ETF I have now), IPE (the other TIPs ETF) and VIPSX, but I was surprised to see how much all three of them differed from the index, especially how drastically they dropped along with the stock market in 2008, when the index hardly fell at all. It looks like my supposedly sober-minded bond allocation got irrationally exuberant as the bubble inflated, and then plunged along with equities (although not to as great an extent) when it popped. I thought the whole idea of having bonds in one's portfolio is that they zig when equities are zagging. Is this what people mean by "in a crash, nothing goes up except correlations"?
Attached Images
File Type: jpg TIPs fund chart.jpg (216.4 KB, 14 views)
__________________

__________________
kyounge1956 is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 07-31-2010, 03:51 PM   #2
Moderator
ziggy29's Avatar
 
Join Date: Oct 2005
Location: Texas
Posts: 15,612
Quote:
Originally Posted by kyounge1956 View Post
I thought the whole idea of having bonds in one's portfolio is that they zig when equities are zagging. Is this what people mean by "in a crash, nothing goes up except correlations"?
That's pretty much what it means, yes. Except in this case, there was something that went up: standard U.S. Treasuries.

TIPS, despite being a Treasury instrument, did fall pretty hard in late 2008. One of the good things that happened for me out of the crash was that I loaded up on individual TIPS with three different maturities from 2016 to 2032. All of them were priced for about a 2.9% real yield.

Seemed like a pretty good place to put some of the "safer" part of my retirement portfolio.
__________________

__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)

RIP to Reemy, my avatar dog (2003 - 9/16/2017)
ziggy29 is offline   Reply With Quote
Old 08-08-2010, 02:10 AM   #3
Recycles dryer sheets
thefinancebuff's Avatar
 
Join Date: Dec 2008
Posts: 262
Quote:
Originally Posted by kyounge1956 View Post
It took a while, but I eventually found an online chart (at Morningstar) which displays the index along with the fund performance. (see belowóchart shows the last 3 years). It doesn't look like there is much difference between TIP (the ETF I have now), IPE (the other TIPs ETF) and VIPSX, but I was surprised to see how much all three of them differed from the index, especially how drastically they dropped along with the stock market in 2008, when the index hardly fell at all.
If you are reading the green line in the middle as the index, it's the wrong index. It's the BarCap Aggregate Bond Index, not a TIPS index. So the TIPS fund and ETFs did better than the nominal bonds in 2007 because of high inflation and fallen real yield (remember $150/barrel oil?) and worse in 2008 because of deflation and risen real yield (great opportunity to buy at that time). TIPS and nominal bonds will diverge at times. It's not tracking error because they are not supposed to track the nominal bond index.
__________________
thefinancebuff is offline   Reply With Quote
Old 08-08-2010, 05:13 PM   #4
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Gone4Good's Avatar
 
Join Date: Sep 2005
Posts: 5,381
Quote:
Originally Posted by ziggy29 View Post
TIPS, despite being a Treasury instrument, did fall pretty hard in late 2008.
Yup. Deflation, which was a big fear back when the world was ending, is bad for TIPS (especially those really old ones with a lot of accrued inflation adjustments) but great for vanilla treasuries.
__________________
Retired early, traveling perpetually.
Gone4Good is offline   Reply With Quote
Old 08-08-2010, 05:27 PM   #5
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Ed_The_Gypsy's Avatar
 
Join Date: Dec 2004
Location: the City of Subdued Excitement
Posts: 5,293
Quote:
(remember $150/barrel oil?)
Whistfully, with great fondness.
__________________
my bumpersticker:
"I am not in a hurry.
I am retired.
And I don't care how big your truck is."
Ed_The_Gypsy is offline   Reply With Quote
Old 08-10-2010, 10:31 AM   #6
Thinks s/he gets paid by the post
kyounge1956's Avatar
 
Join Date: Sep 2008
Posts: 2,171
Quote:
Originally Posted by thefinancebuff View Post
If you are reading the green line in the middle as the index, it's the wrong index. It's the BarCap Aggregate Bond Index, not a TIPS index. So the TIPS fund and ETFs did better than the nominal bonds in 2007 because of high inflation and fallen real yield (remember $150/barrel oil?) and worse in 2008 because of deflation and risen real yield (great opportunity to buy at that time). TIPS and nominal bonds will diverge at times. It's not tracking error because they are not supposed to track the nominal bond index.
oops! that was the index that came up when I asked for the chart of TIP. I wonder if I can change it to the right one. Time to leave for w*rk now, but if I can figure out how to get the correct index to display, I'll re-post the chart.
__________________

__________________
kyounge1956 is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
tips/tips fund Mysto FIRE and Money 1 03-19-2007 10:23 AM
TIPS vs. Vanguard TIPS Fund Cut-Throat FIRE and Money 16 08-15-2006 06:32 AM
Vanguard tracking error? wabmester FIRE and Money 3 12-23-2004 06:30 PM
ETF Tips Fund DFW_M5 FIRE and Money 5 08-19-2004 09:34 AM
TIPS vs. Mutual Fund with TIPS? Telly FIRE and Money 12 07-16-2003 12:21 PM

 

 
All times are GMT -6. The time now is 07:09 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.