Caller: This caller is looking to take a small position in the Treasury Inflation Protected Securities. The caller said he was looking at the TIPS ETF and the Vanguard TIPS fund and noticed different yields – one was 0.8% the other was 3.8%. Bob said he would expect the yields to mirror their respective holdings other than the difference in the expense ratio. The expense ratio on the Vanguard TIPS Fund is very low. Bob said it sounded like it was not an apples-to-apples comparison and he needed to check what the ETF was holding as he expected a true TIPS ETF to be somewhat comparable yield.
EC: The Vanguard Inflation-Protected Securities Fund Investor Shares (VIPSX) has an expense ratio of 0.22% which is very low as Bob pointed out. The average expense ratio of similar funds is almost 4 times that amount according to Morningstar. Learn more about the fund at this url: http://tinyurl.com/7o6v9vm
Caller: Will the the Vanguard Inflation-Protected Securities Fund rise if inflation rises because of investors running to buy its shares, or will the NAV decline because of rising rates? Bob said if you saw the base rate (which is now at record lows) start to rise, then you would likely see the NAV decline. This is what we have seen in reverse since the base rate has gone down, in some instances in the negative territory, whereas the NAV has risen.
Caller: This caller needs to put some money in his Roth and he is considering a bond fund that is also inflation protection. How would you feel about putting money in a bond fund that is inflation protected? Bob said he wouldn’t do that and is not recommending it because the base rate has gone to silly low levels.
Caller: What do you think will happen to inflation protected bonds if we see inflation rise quickly? Bob said in his opinion the WORST thing that could happen for holders of inflation protected bonds would be for inflation to rise because if inflation goes up than interest rates will rise. If that happens, then the base rates on TIPS will go up and that means the net asset value would decline.
EC: Did a lot of digging for an article that explains the problem with TIPS right now and found it! Check out this article entitled, “Why TIPS Make a Terrible Inflation Hedge” at this url:
Kirk Here: I DO NOT agree 100% with Brinker and the article David links to is from a guy who wants you to buy gold.
- Gold has the POTENTIAL (not a prediction) to drop again. Conservative investors would not be pleased if Gold dropped from $1700s back to any of the prices shown on this chart (Gold prices from 2000 to 2012) including under $300 just eleven years ago.
- I buy TIPS directly from treasurydirect.gov and they will NEVER lose any money. I ONLY buy them for myself and my newsletter portfolio when the base rates are positive. If you do that and hold to maturity, you will ALWAYS get your money back and get more, adjusted for inflation, than when you started. They are complex so few really understand them.
- CRBQ is another way to get inflation protection, but like gold (and stocks) it is at risk of a major decline.
Charts for Inflation Protection: CRBQ - GLD - TIP - VIPSX
This above is a subset of the February 12, 2012 issue of "David Korn's Stock Market Commentary, Interpretation of Moneytalk (Bob Brinker Host), Financial Education, Helpful Links, Guest Editorials, and Special Alert E-Mail Service." Together David Korn and I write "The Retirement Advisor" newsletter.
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