Vanguard Launches Short Term TIPS ETF

by on October 17, 2012 | ETFs Mentioned:

Vanguard made an addition to its fixed income ETF lineup this week, rolling out a new fund that targets inflation-protected Treasuries with five years or less remaining to maturity. The new Vanguard Short-Term Inflation-Protected Securities ETF (VTIP) will seek to replicate the performance of the Barclays U.S. 0-5 Year TIPS Index, a benchmark that includes inflation protected securities with a relatively short period of time remaining to maturity. 

Why Short Term TIPS?

The new fund could be popular with investors looking to protect their portfolios against inflation, a growing concern after years of unprecedented injections of fresh capital into financial markets from central banks around the world. Because the principal of TIPS adjusts based on reported CPI, the interest payments made jump in lock step with inflation (at least with official inflation reported by the U.S. government).

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However, there have been some concerns expressed over the ability of TIPS to effectively safeguard portfolios against inflation. Because inflation spikes are often accompanied by interest rate hikes, it is possible that high inflation will have an adverse impact on fixed income securities with long maturities (ie, since higher interest rates generally result in lower prices for outstanding bonds).

VTIP focuses on short-term debt, which inherently features lower interest rate risk than longer term securities. Because VTIP will be less sensitive to changes in interest rates, it won’t be impacted quite as adversely as other bonds when rates inevitably start to rise.

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Given the minimal risk, of course, investors won’t get much in the way of returns from this asset class. VTIP will likely have a 30-day SEC yield in the neighborhood of 1.7%

Short Term TIPS ETFs

According to the ETF screener there are now four short term TIPS ETFs. The popularity of these securities is evidenced by the impressive assets they’ve accumulated; the three existing funds have aggregate AUM of about $2 billion. There are now 14 total ETFs in the Inflation Protected Bonds ETFdb Category with aggregate assets of more than $25 billion. While most of those products offer broad-based exposure to the U.S. TIPS market, there are some international options (WIP, ILB, ITIP, GTIP) as well as a long-term TIPS ETF from PIMCO (LTPZ). 

Consistent with Vanguard’s reputation as a low cost ETF provider, the new fund will charge an expense ratio of just 10 basis points. That’s half of what other similar products already on the market charge:

  • PIMCO 1-5 Year US TIPS Index Fund (STPZ)
  • iBoxx 3-Year Target Duration TIPS Index Fund (TDTT)
  • Barclays 0-5 Year TIPS Bond Fund (STIP)

The key stats for short-term TIPS ETFs are presented below:

  VTIP STPZ TDTT STIP
Expense Ratio 0.10% 0.20% 0.20% 0.20%
Inception Date 10-16-2012 8-20-2009 9-22-2011 3-12-2010
YTD Return  n/a 1.65% 2.42% 2.07%
200 Day Volatility n/a 2.17% 3.35% 1.84%

Disclosure: No positions at time of writing