“The interest payments can change,” said Gargi Chaudhuri, head of iShares investment strategy, Americas, for BlackRock, because those payments are based on principal that can change with inflation.
The C.P.I. has lately outpaced expectations. But that situation hasn’t always prevailed.
“If you look back a decade, inflation expectations sat above where inflation rolled in year after year,” said Steve A. Rodosky, a co-manager of PIMCO’s Real Return Fund. “So people would’ve been better off owning nominal Treasuries.” (“Nominal” is professionals’ term for noninflation-protected bonds.)
Perhaps TIPS’s most confusing quality is the nature of their inflation protection.
It might seem that a TIPS fund would work like hiking pants that zip off into shorts: right for whatever (inflationary) conditions arise. But what sets TIPS apart is the protection they afford against unexpected inflation, said Roger Aliaga-Diaz, chief economist for Vanguard.
Market prices for all assets adjust, to some extent, to reflect anticipated inflation. Prices for standard bonds, for example, fall to compensate for the fact that inflation has purloined part of their original yields. Prices for TIPS fall, too, though the crucial difference is that their inflation adjustments help compensate for that. (Bond prices and yields move in opposite directions.)
Whether you opt for a TIPS fund in your portfolio will probably turn on your age and expectations about inflation.
Retirees and people approaching retirement might choose one because its value should be less volatile than that of other assets that can help buffer inflation, like stocks and commodities, said Mr. Aliaga-Diaz. Vanguard’s Target Retirement 2015 Fund, a so-called target-date fund, allocates 16 percent of its asset value to TIPS.
Jennifer Ellison, a financial adviser in Redwood City, Calif., said her firm, Cerity Partners, currently recommends that clients keep 15 percent to 20 percent of the bond portion of their portfolios in TIPS funds. “But we have been as low as 10 percent at times,” she said.
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