TIPS fund returns

[FinallyRetired]

I feel dumb asking this, but can one of you financial types here explain how TIPS funds calculate returns and why they are so volatile?

I'm looking at TIP -- the Barclays iShares TIPS fund. It shows a 52 wk high of 112.11 and a 52 wk low of 84.14. That's a 25% swing. But the 1 Yr return is quoted at only -0.53% market and -3.61% NAV. That's quite a roller coaster ride for a fund invested in what should be pretty safe instruments.

Is it because money moves in and out so quickly that the fund has to buy/sell TIPS at whatever the market price is? If so, it seems that TIPS funds might be good when inflation takes off, or for a long term hold, but in the short term one could get a pretty good haircut. Am I missing something here?

 

[ziggy29]

It's because the secondary market either bids them up or sells them off depending on their outlook for inflation ahead. When there's high inflation, people are willing to pay more for the inflation protection in TIPS (and take less of a "real" yield), and when the market is suspecting deflation they'll sell off.

 

[samclem]

If I can pile on another question--is there an appreciable difference in the performance of a TIPS ETF and a TIPS MF? Aside from the impact of fees/spreads and ER, do forced sales due to redemptions differentially affect these two vehicles?

 

[Dennis]

IMO? 'market sentiment'... and here's some comments I have kept on file about them:

>I think they are a misconception of what they imply to be..
>Major 'Adjustments' are needed in the TIPS markets..and the Dems have it on their Radar to do so.. to make them Less Volatile , but of course lower Performing...
> Many Devious Traders and Inwestors have found way to Manipulate it
> Top Bond Guru-Larry Swobe advocates 40% in Tips for this yr...But he also di simalar for last yr and very little in Treasuries last yr..
> Bill Gross is not a Fan of them either..
> ETF's have made a major Impact on TIPS.. turning them into just another Trading stock
> SB only for the Long Term Holder and major penalties s/b in place to do otherwise..like CD's have
> Should also be a Tax Free Vehicle, like a Muni bond is..
> Gambling on playing the Inflation ( or Deflation) game is Fool Hearty..
> Tips/ Index has been Infiltrated by it's Enemies of what it was intended for..
> More Refining of the Tips market is In order..to keep out Predators..

I bailed on Tips after 04'' and am not back in them yet..
05-08'. 2.9% apy is not my cup of tea for bonds in my Port. Better off In other Taxable Bonds or Muni's..

Ps> to Ziggy? Love your Dog Pic, looks just like Mine..

 

[FIRE'd@51]

TIPS prices are very sensitive to changes in the real rate of interest. The Vanguard TIPS fund (VIPSX) has an average maturity of about 9 years. At a real rate of 2%, this implies a duration (bond price-sensitivity) of about 8, which means that a change in real interest rate of 1% implies a price change of about 8%. Over the past year, the 10-year real rate of interest has varied from below 1% to over 3%. This variation in the real rate of interest can explain most of the fluctuation in the price of TIPS funds or ETF's.

The only way to reduce this price-sensitivity is to shorten the maturity (and, thus duration) of TIPS. Investors can do this by buying shorter-term TIPS, or the Treasury could issue even shorter-term TIPS than the 5-year.

Another possibility would be to strip TIPS and issue interest-only and principal-only pieces, something I have advocated on this forum before. For a stripped 10-year TIPS, the interest-only piece would have a duration of about 4.5, and the principal-only piece would have a duration of about 10. Thus, the interest-only piece would exhibit much less price volatility. It would also serve as a fixed-term inflation-adjusted annuity with an attractive withdrawal rate (about 11%). Such a security could be used by ER's as a "bridge" to SS.