TIPS (Treasury Inflation-Protected Securities) are treasury bonds linked to inflation. Here we’ll look at the best TIPS ETFs.
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Introduction – Why TIPS?
TIPS stands for Treasury Inflation-Protected Securities. These are treasury bonds issued by the U.S. government that are indexed to inflation, protecting investors from a decline in purchasing power of the U.S. Dollar. As inflation rises, so too does the principal value of the TIPS bond.
TIPS are more correlated with stocks than treasury bonds but less correlated than corporate bonds. Like “normal” bonds, TIPS are issued at different maturities, and there are various ETFs available at different lengths. Note that while the principal will keep up with inflation, the interest payment may not. Moreover, while the par value rises with inflation, it falls in periods of deflation.
TIPS are not ideal for income investors because their interest payments are usually less than those of government and corporate bonds. The primary purpose of TIPS is inflation protection. As such, TIPS can be a crucial part of an all-seasons portfolio.
Below we’ll look at the best TIPS ETFs.
The 4 Best TIPS ETFs
Below are the 3 best TIPS ETFs, sorted by shortest to longest maturity.
VTIP – Vanguard Short-Term Inflation-Protected Securities ETF
Investors seeking short-term TIPS, with less interest rate risk, can use the Vanguard Short-Term Inflation-Protected Securities ETF (VTIP). The fund seeks to track the Barclays Capital U.S. Treasury Inflation-Protected Securities (TIPS) 0-5 Years Index. This ETF has a weighted average maturity of 2.8 years and an expense ratio of 0.04%.
STIP – iShares 0-5 Year TIPS Bond ETF
STIP from iShares is another short TIPS fund that is nearly identical to VTIP except that it has a slightly lower fee of 0.03%. It seeks to track the Bloomberg US Treasury TIPS (0-5 Y) Index and has over $12 billion in assets.
SCHP – Schwab U.S. TIPS ETF
Slightly longer than VTIP above – and more popular – is the Schwab U.S. TIPS ETF (SCHP), which seeks to track the Barclays Capital U.S. Treasury Inflation Protected Securities (TIPS) Index. This ETF has a weighted average maturity of 8.2 years and an expense ratio of 0.05%.
LTPZ – PIMCO 15+ Year US TIPS Index Fund
Investors seeking long-term TIPS can use the PIMCO 15+ Year US TIPS Index Fund (LTPZ), which has a weighted average maturity of 23.8 years. The fund seeks to track the BofA Merrill Lynch 15+ Year US Inflation-Linked Treasury Index and has an expense ratio of 0.20%.
Where To Buy These TIPS ETFs
All the above TIPS ETFs are available at M1 Finance. M1 has zero trade commissions and zero account fees, and offers fractional shares, dynamic rebalancing, intuitive pie visualization, and a sleek, user-friendly interface and mobile app. I wrote a comprehensive review of M1 Finance here.
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Disclaimer: While I love diving into investing-related data and playing around with backtests, I am in no way a certified expert. I have no formal financial education. I am not a financial advisor, portfolio manager, or accountant. This is not financial advice, investing advice, or tax advice. The information on this website is for informational and recreational purposes only. Investment products discussed (ETFs, mutual funds, etc.) are for illustrative purposes only. It is not a recommendation to buy, sell, or otherwise transact in any of the products mentioned. Do your own due diligence. Past performance does not guarantee future returns. Read my lengthier disclaimer here.
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Which of these funds are best for 10 year duration?
David Paul Vartian says
Are “Tips” funds good in a taxable account or better in a tax deferred or Roth accunt?
John Williamson says
Fine for either but less tax-efficient than stocks.