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Scott B

For TIPS investment, better to do a Vanguard fund or purchase individual bonds?

 Thanks, SWall

SWall,

If you can buy them at issue, you might consider purchasing them directly. This is particularly true if you are considering building a ladder of TIPS over a period of time. One might, for instance, buy a 5 year TIP equal to your expected need for funds 5 years from now and do that each year prior to retirement.

Most individual investors will be at a great disadvantage in the after-market due to the complexity of pricing these bonds. That's why most investors should go directly to a fund or ETF.

Scott

TIP is an I-Shares ETF that shows a current yield of 8.1%.  I don't see how that makes sense when compared with the Vanguard Inflation Protected fund showing an SEC yield of 1.4%.

Do you know what the differences are to explain this?  Is this the ETF you'd recommend for Couch Potatos?

Neither figure can be used. The return on TIPS has three components--- the interest rate premium or coupon, the CPI adjustment, and valuation change of the interest rate premium. Currently the interest rate coupon ranges from nominal to just under 2 percent while the trailing inflation rate is about 4.5 percent. That suggests a total return, ex any market change (ho-ho!) of about 6.5 percent.

Here's the link to TIPs on the Morningstar website. It shows a 16.95 percent total return over the last 12 months and a yield of 5.58 percent.

http://quicktake.morningstar.com/etfnet/TotalReturns.aspx?Country=USA&Symbol=TIP

Scott

Zvi Bodie notes that to get the risk-free advantages of TIPS, you need to buy them at auction, not via a fund:

"When you hold TIPS in a mutual fund it becomes just another risky asset; this is the great irony; in order for TIPS to be really safe; to use them to lock in some spending target you have to be able to match the maturity of the bond to your spending goal.  But you can't do that with TIPS mutual funds."

From an interview here:

http://network.nationalpost.com/np/blogs/wealthyboomer/archive/2007/11/24/worry-free-investing.aspx

 So this makes me think that if you are younger, maybe the Vanguard TIPS fund is an OK option as you may not have any set savings goals in mind other than retirement, whereas for those on the cusp of retirement, you can really dial-in your returns via the auctioned TIPS.  Is my understanding correct?  Thanks --

Finch,

You nailed it. When you buy a mutual fund portfolio you gain the power of large scale buying but you also lose the benefit of having real maturity dates, times when you know you will be able to receive the actual cash value of your bond.

So Zvi Bodie is correct. What he is talking about with the use of individual TIPS is what financial types call "immunization"--- matching the maturity of known liabilities (such as your annual need for food) with the maturity of a specific security.

Scott