Vanguard, the Wayne, Pennsylvania-based leader of low-cost equity-linked exchange-traded funds has launched the Vanguard Short-Term Inflation Protected Securities Index Fund (VTIP) as the firm continues to expand its offerings in the fixed-income asset class. This is the firm’s first product that focuses on the short-term TIPS market.
Treasury Inflation Protected Securities (TIPS) have evoked much interest among a wide range of investors and is particularly popular among those who seek to invest in fixed-income securities that offer some protection against rising prices, a legitimate concern after years of liquidity injection (i.e. quantitative easing) by central banks across the world.
VTIP targets the short-end of the TIPS curve and invests in securities that have a maturity of five years or less with an aim to achieve inflation-adjusted real returns and capital preservation. Since the short-end of the yield curve shows less price fluctuation against inflation, the fund can be expected to have lower volatility and lesser real interest-rate risk than traditional long-maturity TIPS funds.
The passively managed fund replicates the performance of the Barclays US Treasury Inflation Protected Securities 0-5 Year Index, a market weighted benchmark that tracks the performance of the inflation-protected public obligations of the US Treasury. The index has an average duration of 2.71 years and an average maturity of 2.76 years.
TIPS securities pay out interest semi-annually. Since the principal of TIPS adjusts depending on reported Consumer Price Index, the coupon payments made vary in lock step with inflation.
VTIP is the cheapest fund in its category with an annual expense ratio of just 10 basis points. Its direct competitors, the PIMCO 1-5 Year US TIPS Index Fund (STPZ) that tracks the BofA Merrill Lynch 1-5 Year US Inflation-Linked Treasury Index, charges 20 basis points, while the Blackrock iShares Barclays 0-5 Year TIPS Bond ETF (STIP), also tracking the Barclays TIPS 0-5 Year Index, costs 20 basis points annually.
VTIP may be a good addition to TIP, which we currently own, once more price data and dividend information becomes available. I will run some comparisons in the future and will update this blog post with my findings.
Disclosure: No holdings