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. TIPS 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 of 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 VY BlackRock Inflation Protected Bond Portfolio (IBRIX) and The Vanguard Inflation-Protected Securities Fund (VIPSX).
Treasury Inflation-Protected Securities (TIPS)
VY BlackRock Inflation Protected Bond Portfolio (IBRIX)
The VY BlackRock Inflation Protected Bond Portfolio invests at least 80% of its net assets in inflation-indexed bonds of varying maturities issued by the U.S. and non-U.S. governments, their agencies and U.S. and non-U.S. corporations. The fund, ranked three stars by Morningstar, may invest up to 20% of the portfolio into any of the following assets: high-yield bonds, emerging market debt, and non-dollar denominated securities of non-U.S. issuers. At the portfolio manager's discretion, IBRIX may invest in U.S. Treasury securities, mortgage-backed securities, investment-grade corporate bonds, asset-backed securities, or collateralized mortgage obligations (CMOS).
IBRIX maintains an average portfolio duration within plus or minus 20% of the duration of the Barclays Capital Global Real U.S. TIPS Index. A majority of its top 10 holdings are U.S. TIPS, comprising 31% of its $289.4 million in net assets. IBRIX has a trailing one-year yield of 1.66% and does not have a minimum investment.
Vanguard Inflation-Protected Securities Fund (VIPSX)
The Vanguard Inflation-Protected Securities Fund is one of the largest TIPS funds available with $31 billion in net assets. The fund invests in bonds backed by the full faith and credit of the federal government and whose principal is adjusted quarterly based on inflation. VIPSX has 49 holdings, and 100% of them are U.S. TIPS. It has an average effective duration of 7.9 years, a yield to maturity of 0.4%, and a trailing one-year yield of 1.66%. The minimum investment for this fund is $3,000.