2 High-Yielding TIPS Bond Funds

Treasury inflation-protected securities (TIPS) are a very beneficial addition to many investment portfolios because of their diversification benefits and protection when inflation is rising. Inflation represents the pace of rising prices in an economy.

Treasury inflation-protected securities are adjusted to the most commonly used inflation measure, the Consumer Price Index (CPI). When the CPI rises, the principal amount of TIPS is adjusted upward, and when the CPI falls, the principal is adjusted downward. The coupon rate stays constant, thus generating varying amounts of interest-based off on the inflation-adjusted principal. The end result is that investors are protected against inflation.

This asset class generally does not provide high yields because of its low-risk nature. However, some TIPS bond funds do have attractive yields, including the iShares 0-5 Year TIPS Bond (STIP) and The Vanguard Inflation-Protected Securities Fund (VIPSX).

iShares 0-5 Year TIPS Bond (STIP)

• Assets under management (AUM): $11 billion (as of April 01, 2022)
• Expense ratio: 0.03% (as of March 01, 2022)
• 30-day SEC yield: 9.35% (as of March 31, 2022)
• 1-year return: 5.25% (as of Feb. 28, 2022)
• 3-year return: 5.02%
• 5-year return: 3.32%
  
• Inception Date: Dec. 1, 2010
• Issuer: BlackRock Financial Management

BlackRock's iShares 0-5 Year TIPS Bond ETF tracks its benchmark index, the Bloomberg U.S. Treasury Inflation-Protected Securities (TIPS) 0-5 Years Index (Series L). In other words, the fund is primarily composed of inflation-protected U.S. Treasury bonds with maturities of less than five years.

Below is the fund's exposure breakdown by maturity:

• 0-1 years: 18.25%
• 1-2 years: 16.38%
• 2-3 years: 20.37%
• 3-5 years: 43.85%
  

The expense ratio of 0.03% is fairly low, making it a viable alternative to more expensive funds with higher net assets. The STIP's total asset amount is smaller than Vanguard's offering, which manages over $41 billion (outlined below). Since the STIP is an exchange-traded fund (ETF), there are no investment minimums other than the purchase price of one share.

STIP pays a monthly distribution on its yield and trades on the price of its 17 holdings. The fund has an impressive 30-day SEC yield of 9.35%, with its funds carrying an average maturity of 2.51 years.

Vanguard Inflation-Protected Securities Fund Investor Shares (VIPSX)

• Assets Under Management: $41.2 billion (as of Feb. 28, 2022)
• Expense Ratio: 0.20%
• 30-day SEC yield: -1.75% (as of March 31, 2022)
• 1-year return: 4.06% (as of March 31, 2022)
• 3-year return: 6.01%
• 5-year return: 4.20%
• Inception Date: June 6, 2000
• Issuer: The Vanguard Group

The Vanguard Inflation-Protected Securities Fund is one of the largest TIPS funds available with $41.2 billion in net assets. The fund invests primarily in U.S. TIPS with various maturities. The VIPSX has 51 holdings and an average effective duration of 7.6 years.

Below is the fund's exposure breakdown by maturity:

• 0-1 years: 2.2%
• 1-5 years: 49.10%
• 5-10 years: 30.50%
• 10-15 years: 0.06%
• 15-20 years: 3.9%
• 20-25 years: 7.9%
• Over 25 years: 5.8%

The minimum investment for this fund is $3,000. The Vanguard VIPSX can be a good option for those looking for a long-term approach to their high-yield TIPS strategy. Although the 30-day SEC yield can be negative at times, the long-term performance can make up for that since the fund is primarily invested in bonds with longer-dated maturities.

Special Considerations

Investing in a TIPS fund is not the same as investing in actual TIPS. TIPS funds hold a basket of TIPS bonds in order to deliver returns and produce the desired yield. However, investors can purchase individual TIPS bonds if they believe that a particular bond might outperform a TIPS fund.

However, bond funds are more diversified, meaning they limit exposure to the individual price movement of one bond. As a result, funds are usually considered a safer alternative to individual TIPS offerings. Also, bond funds containing TIPS are more convenient to own than trying to create a portfolio of individual bonds.

However, the downside is that an investor will be paying a slight management fee to the fund that covers the cost of balancing the TIPS fund. TIPS funds are not able to reach maturity, unlike a TIPS bond, and as such, are only able to be cashed out at the current price, which is not always a higher price than the initial investment. As a result, TIPS funds can be considered a riskier investment than a TIPS bond.

The Bottom Line

Both BlackRock's STIP and Vanguard's VIPSX funds provide investors with easy access to the TIPS market while providing diversification. The expense ratios are low, but investors should consider any tax implications of owning TIPS and consult a tax professional before investing. It is worthwhile to note that although the funds may appear to produce positive returns, it's important to compare those returns against inflation to determine the "real" return on the investment.