Key Takeaways:
- Treasury Inflation-Protected Securities (TIPS) protect against inflation
- Principal amount increase and decrease with inflation
- Because the interest rate does not change, interest payment rises as principal increases due to inflation
- Inflation results in increases in both principal and interest payments, providing investors some protection
What are TIPS?
Treasury Inflation-Protected Securities (TIPS) are US Treasury bonds created to fight against inflation. The principal of TIPS moves with inflation as measured by the Consumer Price Index. Therefore, in a high inflationary environment, the principal will increase too.
TIPS also pay interest. Interest payments are based on the principal and will increase when the principal increases, protecting the investor against inflation.
Pros and Cons
The main pro is the inflation protection that TIPS is designed to do.
However, that design comes at a high price. TIPS are expensive securities to provide inflation protection characteristics. In fact, TIPS has a negative real yield today, which requires extra attention to place into a portfolio. Despite the negative yield, some TIPS indexes delivered good returns historically (although the past is no guarantee of future performance). For example, the Bloomberg U.S. TIPS Index had a total annual return of ~7% in 2021.
Who offers TIPS?
TIPS are offered similar to stocks – investors can choose from specific TIPS, mutual funds that include TIPS, or ETFs based on TIPS. These different approaches allow different levels of diversification and risk.
One of the easiest ways to invest in TIPS is through a personal brokerage account. The bond funds that are out there include Fidelity’s Inflation-Protected Bond Index Fund (FIPDX), Schwab U.S. TIPS ETF (SCHP), and Vanguard Short-Term TIPS Index (VTAPX).
Disclaimer: The contents of this website are opinions and are for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.