TIPS CEF anyone?

[Htown Harry]

I'm looking toward putting a modest slice of my bond allocation into a TIPS fund. As I often do, I'm surveying to see what might be the pros and cons of an individual issue vs. a mutual fund vs. a closed end fund.

Any investment would be in tax-deferred accounts. My time horizon is 5 yrs. +.

One option that caught my eye was a PIMCO mutual fund that in theory holds TIPS targeted for 2019, which is somewhere near my FIRE date. However, the actual duration of current holdings is closer to 3 years. The fund's small size, a .79% ER and a fat sales charge pretty much rule this one out for me.
PIMCO | PIMCO Real Income 2019 Fund

Morningstar has a good overview of six closed end TIPS-heavy funds here:
CEFs for Inflation Protection

Their most current CEF Weekly Update lists both WIA and WIW as "relatively inexpensive" based on current discount (over 10%) vs. historical discount (5% and 8%, respectively).
http://news.morningstar.com/pdfs/cefw090211.pdf

WIA and WIW are also discussed here in a Seeking Alpha column:
Using CEFs to Buy TIPS at a Discount - Seeking Alpha

I'm leaning toward WIW because there is a major holder named William H. Gates III (aka Cascade Investments) that has increased holdings aggressively, purchasing about 1.9 million shares over the past two months. WIW - Stock Quote for Western Asset/Claymore Inflation Linked Opportunities & Income Fund - WIW Stock price - real time stock quote for Western Asset/Claymore Inflation Linked Opportunities & Income Fund I figure Bill Gates can afford better financial advisors than I can...and if he's working on a plan to take the fund open-ended there is a possibility of a windfall return.

I am sure I've zeroed in on a pretty good choice in the CEF universe, but I'm unsure how to go about comparing to a low-cost mutual fund (the baseline comparison might be VIPSX) or buying a few individual bonds.

Any comments or advice welcomed.

 

[DblDoc]

I'm having a hard time figuring out what your goal for this money is. You state your horizon is 5 years. What happens in 5 years that you want to use this money for?

I have 1/3 of my bonds in VIPSX. It's my hedge against unexpected inflation. My horizon is (hopefully) decades when I/Spouse die...

DD

 

[Htown Harry]

I'm having a hard time figuring out what your goal for this money is. You state your horizon is 5 years. What happens in 5 years that you want to use this money for?

I have 1/3 of my bonds in VIPSX. It's my hedge against unexpected inflation. My horizon is (hopefully) decades when I/Spouse die...

DD

Sorry for the confusion - In general, like you I am interested in creating some protection against inflation eating into bond values.

5 years is my approximate FIRE date. I also hope to have a much longer horizon for yours truly and DW

I'm familiar with CEF's, their mechanics and the pros and cons.

I'll rephrase.

Seems like my first choice is individual bonds (perhaps laddered) vs. a fund.

Choice #2 - If a fund, does a CEF TIPS fund hold any special advantages or risks beyond those inherent in CEFs generally?

Choice #3 - If I choose a CEF for the usual reasons, how about WIW in particular?

 

[DblDoc]

Got it.

Bogleheads has a very detailed breakdown of rolling ladders vs funds here:Rolling Ladders versus Bond Funds - Bogleheads

Can't help with the CEF stuff. My brief look at them failed the TANSTAAFL sniff test but maybe there are compensated risks there worth exploring.

DD

 

[Gone4Good]

As I see it, there are two primary benefits to owning a bond fund 1) Instant diversification 2) Low cost (retail mark-ups on most individual bonds are terrible).

In the case of a pure TIPS fund, neither of those two reasons apply in my view. Diversification is mooted by the fact that you're deliberately investing in a specific class of bonds of a single issuer, US Government TIPS. Low cost also doesn't apply because you can buy TIPS at auction without paying brokerage commissions. Plus, you don't have to pay a fund manager fees to sit on your bonds.

Add in the benefit of being able to manage maturities (asset/liability match) with individual bonds and I'm hard pressed to think of a reason why I'd want to own a TIPS fund. Simplicity, I guess.

 

[DblDoc]

Simplicity, I guess.

Works for me. Plus you aren't tempted into buying and selling the darn things like a group over at BH are in the midst of currently.

DD

 

[Htown Harry]

Low cost also doesn't apply because you can buy TIPS at auction without paying brokerage commissions.

All of the funds I would be investing would be from IRAs or other tax-deferred accounts, so I don't think this would be accurate in my case. I'd need to go through the brokerage desk at Vanguard, correct?
http://www.early-retirement.org/forums/f28/buying-tips-directly-in-ira-26353.html

Looks like the fees would be low for a newbie Voyager client using assistance to buy at auction ($15 per bond), but not so cheap for existing issues ($50-125). If I was confident enough to try a DIY online order, it would go lower: to free for auction bonds and $0.75 per $1000 for existing issues.
https://personal.vanguard.com/us/whatweoffer/stocksbondscds/feescommissions

Figuring out the comparison between these fees to build a ladder vs. a fund's expense ratio sounds like w*rk, so I'm definitely leaning toward a fund for choice #1. This quote from the article DblDoc provided sums it up nicely for me - I'll pay a convenience fee for the time savings and liquidity.

"For treasury bonds (including TIPS), which are assumed to lack any credit risk, the diversification of a fund adds little benefit over a rolling bond ladder. Therefore the expense ratio is merely a convenience fee (or perhaps a small liquidity premium). For a low-cost Treasury fund, however, that fee may be reasonable and is a matter of personal preference. If the greater liquidity and lower demands on investor time of a fund are not desired, the preferred method of investing in Treasuries is to purchase individual bonds at auction (which is generally free), assuming the spread over equivalent off-the-run issues is not too large"​

 

[haha]

I'm leaning toward WIW because there is a major holder named William H. Gates III (aka Cascade Investments) that has increased holdings aggressively, purchasing about 1.9 million shares over the past two months. WIW - Stock Quote for Western Asset/Claymore Inflation Linked Opportunities & Income Fund - WIW Stock price - real time stock quote for Western Asset/Claymore Inflation Linked Opportunities & Income Fund I figure Bill Gates can afford better financial advisors than I can...and if he's working on a plan to take the fund open-ended there is a possibility of a windfall return.

Look carefully at that fund. It has been several years, but I looked at it for the same reason that you did. I rejected it in favor of buying TIPS directly, but I cannot remember exactly why. Many of those WA/Claymore Funds are pretty expensive

Ha

 

[Gone4Good]

Treasuries is to purchase individual bonds at auction (which is generally free), assuming the spread over equivalent off-the-run issues is not too large"

The highlighted comment has it exactly backwards. New bond offerings typically come at a discount (higher yield) to existing bonds - they have to otherwise folks would just buy the existing bonds. So TIPS sold at auction, for zero commission, are actually better than free.