Even as rate cuts occupy center stage in the 24-hour financial news cycle, surprise inflation could strike anytime. In the current macro environment, inflation could stem from the constant wildcard of tariff policy. This means fixed income investors should stay on the defensive, and treasury-inflation protected securities (TIPS) ETFs will allow them to do just that.
More specifically, consider this pair of funds: the Vanguard Total Inflation-Protected Securities ETF (VTP ) and the Vanguard Short-Term Inflation-Protected Securities ETF (VTIP ). The Congressional Budget Office warned that tariff policy is pushing inflation expectations higher than initially anticipated. If that’s indeed the case, then these funds can be beneficial, especially if tariff-fueled inflation remains an ongoing issue.
By tracking inflation-protected securities from the U.S. Treasury, VTP seeks returns that closely align with realized inflation. If inflation continues to surprise the market and the Fed makes an unforeseen pivot from its current interest rate policy, then VTP makes for an ideal hedge. VTIP does the same, but focuses on TIPS with short-term maturity dates of less than five years. As such, it offers additional rate risk mitigation.
On the other hand, VTP steps further out on the yield curve by focusing on debt with intermediate and long-term maturity dates. This allows for more yield potential while still maintaining the inflation protection inherent in TIPS. Both funds offer cost-effective solutions for inflation with VTP’s expense ratio of 0.05% and VTIP’s 0.03%.
TIPS Transparency in ETFs
In addition to the flexibility and cost-efficiency of ETFs, both funds also offer greater transparency as opposed to holding individual bonds. That’s especially helpful when looking to add TIPS exposure.
“So as things like inflation changes, as interest rates change, the value of that bond is gonna change,” explained Morningstar senior manager research analyst Dan Sotiroff. “The ETF is going to have to change its price to reflect the changes in the value of that bond, so it’s going to change, you know, minute by minute if changes are occurring that quickly, day by day, hour by hour, etc.”
This is in contrast to individual TIPS where price changes are not taking place in real time. Price changes will only be reflected when the bond is sold before maturity, Sotiroff explained.
“The bond that you hold in your brokerage account isn’t going to change because it’s not trading. It’s just sitting in your account,” Sotiroff said. “So it’s going to look more stable optically, but behind the scenes, the value of that bond is actually changing, you just don’t see it.”
“You’re going to see the prices update on the ETF much more frequently, whereas the bond that you’re holding in your brokerage account isn’t going to be changing that frequently, if at all,” Sotiroff added.
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