How to use Treasury inflation-protected securities in your portfolio
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It’s been a tough year for bonds, including Treasury Inflation-Linked Securities, or TIPS, an inflation-linked asset. Despite recent losses, TIPS offer portfolio diversification amid market uncertainty, experts say.
Backed and issued by the US government, investors can buy TIPS with a term of five, 10 or 30 years, with twice-yearly payment based on the asset value, which is adjusted for inflation every six months.
However, bond values and market rates are moving in opposite directions, causing TIPS values to fall as the Federal Reserve has hiked rates.
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From October 10th is the iShares TIPS Bond ETF is down more than 13% year to date. However, TIPS have surpassed that S&P 500 Indexwhich has fallen by almost 24%.
“In that environment, it was a perfect win,” said Chartered Financial Planner Anthony Watson, Founder and President of Thrive Retirement Specialists in Dearborn, Michigan.
TIPS — particularly TIPS funds with shorter average maturities — have provided cushion in the face of double-digit losses for stock and bond markets, he said.
When interest rates go up, you want TIPS to mature faster and be reinvested to take advantage of higher yields faster, he said.
Generally, Watson allocates 20% of a client’s fixed income portfolio to a TIPS fund, such as Vanguard’s Short-Term Inflation-Linked Securities Index Fund ETFwhich invests in assets with an average maturity of 2.6 years.
Jamie Dimon, CEO of JPMorgan Chase, said on Monday that the U.S. is likely to slip into a recession in the next “six to nine months,” and forecast the S&P 500 to fall another 20% depending on the Federal Reserve’s future plans could.
It was a perfect enrichment in this environment.
Anthony Watson
Founder and President of Thrive Retirement Specialists
Nicholas Bunio, a CFP at Retirement Wealth Advisors in Berwyn, Pennsylvania, also uses TIPS allocations for diversification, opting for funds rather than individual assets for “simplicity and convenience.”
However, if someone cannot stomach losses from TIPS, there is always an option to buy individual TIPS and hold them to maturity, he said.
TIPS investors focus on ‘capital preservation’
David Enna, founder of Tipswatch.com, a website that tracks inflation-linked assets, said “preservation of capital” is one of the key motivations for TIPS investors, particularly those approaching retirement.
“They’re a lot less risky right now than they used to be,” Enna said. “And they’re certainly less risky than the stock market right now.”
“I think it’s good to have a mix of types of fixed income,” added Enna, who personally owns both short-term TIPS funds and individual TIPS.