TIPS vs. Vanguard TIPS Fund

[Cut-Throat]

What would you think is the probably difference in return between buying TIPS directly vs. Holding the Vanguard TIPS fund would be over a long term period, say 10-15 years?

This would be after all fund expenses and end expenses of selling the TIPS via a bank or broker.

Are we talking as much as a half a percent here or is it much less than that?

 

[wabmester]

You don't pay any commission or spread to purchase TIPS from the treasury, and if you hold to maturity, then there's no selling cost.

You're paying Vanguard 0.2% a year, so over 10 years (1.002^10), you're paying a little over 2%.

 

[Cut-Throat]

So it's basically the expense of the mutual fund that is the difference? Correct?

I am holding the Admiral Fund of TIPS and its expense is .11% - So it's about 1/10 of a percent a year?

That may be worth it to me for the liquidity.

 

[samclem]

CT,

- Of course, if you need to buy the TIPS from a broker instead of the Treasury (because you can't wait for the auction or you want a different maturity date than the new ones have) then you'd pay a broker's commission. And, if you don't hold them until maturity then you'll pay another commission to sell them. There are no such fees for the Vanguard TIPS Fund (unless you buy/sell through a broker other than Vanguard)

- And, as we've beat to death in other conversations-- with the actual TIPS you know exactly how much you will get at maturity. With the TIPS fund there's no certainty of the price you'll get when you sell your shares. So, that could be another "cost".

 

[Cut-Throat]

And, as we've beat to death in other conversations-- with the actual TIPS you know exactly how much you will get at maturity. With the TIPS fund there's no certainty of the price you'll get when you sell your shares. So, that could be another "cost".

Yes, I am aware of that, but I was thinking that long term 10-15 years, this may 'even' things out a bit? So, I am trying to figure out what the 'average cost' would be in holding the fund. Over a long term (10 years or so), if it's just the expense ratio, I may lean towards the fund.

In fact, I may even consider a 100% TIPS portfoilo after I was 65 years old. - Just the thought of a 100% anything gives me the willies. But if TIPS leaves a 'good track record for 10 years or so, I might be persueded.

 

[73ss454]

To add to CT's question. If you have over 1M with vanguard and get 8 free trades would vanguard buy individual TIPS at the auction and not charge commissions?

 

[WilliamG]

I think treasuries at auction (including TIPS) are all without fee at Vanguard.

 

[saluki9]

CT

In addition to the mgmt expenses you also have to factor in the cash drag. (assuming you're not spending the coupon) in the fund all interest is automatically invested into other TIPS, when you hold the bonds (for most people) that cash languishes until you do something with it

If you have the room in a tax deferred account, I would just buy the bonds. In that sense you would have to buy them through a broker (TD doesn't do IRAs) but I still think you would come out even and have a much better control over your duration and maturity

In addition, if you don't buy them at auction you should watch the spreads. No doubt Vanguard is getting them as low as they can get, but individuals may get screwed if you're buying anything less than $100K worth

 

[Gone4Good]

So it's basically the expense of the mutual fund that is the difference? Correct?

I am holding the Admiral Fund of TIPS and its expense is .11% - So it's about 1/10 of a percent a year?

That may be worth it to me for the liquidity.

The expense ratio and "alpha" would be the big difference.  "Alpha" is the value the fund manager destroys creates through his positioning of the portfolio.  Trades employed by the manager in creating "alpha" may also create taxable gains, which wouldn't be owed in a pure buy and hold account.

 

[Cut-Throat]

I'll bring this thread to the top again as there were a few unanswered questions.

I have another question. Speculative.

If you had to guess, what interest rate do you think the Vanguard TIPS fund would pay over the CPI (real) over the next 10-20 years? In APR.

 

[saluki9]

I'll bring this thread to the top again as there were a few unanswered questions.

I have another question. Speculative.

If you had to guess, what interest rate do you think the Vanguard TIPS fund would pay over the CPI (real) over the next 10-20 years? In APR.

I can think of a couple people here who might disagree with me, but here goes.

You can do all of the models, calculations, bootstrapping, backward induction,etc etc etc The fact is that most of them are not going to be more accurate than the current yield.

So, in short, your current yield is the best estimate of future yield. Now with TIPS you are relying on the BLS' calculations, but looking at the long term TIPS and the market is pricing in a similar inflation estimate.

 

[Nords]

So, in short, your current yield is the best estimate of future yield.  Now with TIPS you are relying on the BLS' calculations, but looking at the long term TIPS and the market is pricing in a similar inflation estimate.

If it wasn't, then it would be shortly after the quants & arbs figured it out and bid accordingly at the auctions...

 

[Cut-Throat]

I can think of a couple people here who might disagree with me, but here goes.

You can do all of the models, calculations, bootstrapping, backward induction,etc etc etc The fact is that most of them are not going to be more accurate than the current yield.

So, in short, your current yield is the best estimate of future yield. Now with TIPS you are relying on the BLS' calculations, but looking at the long term TIPS and the market is pricing in a similar inflation estimate.

So looking at the Current Yield ouside of the inflation adjustment - On Vaguard's website The Admiral TIPS fund yield is state at 2.3% real? Correct?

So, a 2.3% yield above CPI (real) is not too bad at all! - It's actually about 1.3% more than I'm planning on.

 

[brewer12345]

So looking at the Current Yield ouside of the inflation adjustment - On Vaguard's website The Admiral TIPS fund yield is state at 2.3% real? Correct?

So, a 2.3% yield above CPI (real) is not too bad at all! - It's actually about 1.3% more than I'm planning on.

That's about the way it looks. The tough part is that a highly inflationary environment would eat up a lot of that vig in the form of taxes, at least if you hold it in a taxable account.

 

[Cut-Throat]

That's about the way it looks. The tough part is that a highly inflationary environment would eat up a lot of that vig in the form of taxes, at least if you hold it in a taxable account.

Well, all of my TIPS investments are in Tax-deffered accounts, so I never payed to much attention to the taxes on them. But in a highly inflationary environment like we had in the 70's, TIPS would be the place to be - I would guess? Is the inflation adjustment taxed as ordinary income and not capital gains?

Where you like to be invested in a highly inflationary environment? Cash?

 

[saluki9]

Well, all of my TIPS investments are in Tax-deffered accounts, so I never payed to much attention to the taxes on them. But in a highly inflationary environment like we had in the 70's, TIPS would be the place to be - I would guess? Is the inflation adjustment taxed as ordinary income and not capital gains?

Where you like to be invested in a highly inflationary environment? Cash?

Well, during high periods of inflation you would want to be in short term TIPS. That way you get the advantage of a guaranteed return and at the same time you don't get hammered by interest rate risk like you would in a longer maturity portfolio.

It sounds like you have prett reasonable expectations. If I were you I would ladder them out about 10 years and go tie some more flies. Once a year, remember to reset the ladder and go do some more fishing. As long as you're in a tax deferred account (which you said you were) you don't have to worry about the slightly more complicated taxation of TIPS.

 

[brewer12345]

Where you like to be invested in a highly inflationary environment? Cash?

Commodities, real estate and other tangible assets, preferably financed with long term fixed rate debt. But I think that TIPS are a quite reasonable choice for a FI portfolio allocation. Again, (on portfolio issues) I agree with saluki. A TIPS ladder should do great.

FWIW, I actually believe that the Fed is behind the curve on fighting inflation and that the bond market has been suckered in by Bill Gross and is underestimating future inflation. As such, I am not much interested in long term bonds unless they are inflation-indexed.