If inflation rears its ugly head, The Vanguard Group Inc.’s first new bond fund in three years should help investors fight it.
The Vanguard Short-Term Inflation Protected Securities Fund Ticker:(VTIP) will invest in Treasury inflation-protected securities with a maturity of up to five years. The new ETF has an expense ratio of 10 basis points — half that of the $1 billion Pimco 1-5 Year U.S. TIPS Index Fund Ticker:(STPZ) and the $386 million iShares Barclays 0-5 Year TIPS Bond ETF Ticker:(STIP), each of which charges 20 basis points.
The focus on shorter-term TIPS should offer investors inflation protection with less volatility than longer-term TIPS, gold, stocks and real estate investment trusts, Vanguard chief investment officer Gus Sauter said in a statement.
Short-term TIPS also tend to be more reactive to changes in inflation expectations than longer-term ones, said Tim Strauts, an ETF analyst at Morningstar Inc. “If you’re betting on rising inflation, there’s going to be more movement in the short-term TIPS,” he said.
That’s one of the main reasons the short end of the TIPS maturity curve has grown to 40% of the total market, up from 13% 10 years ago. It’s also now the most liquid part of the TIPS market, according to Vanguard spokesman David Hoffman.
The threat of inflation has come into sharper focus recently, thanks to the Federal Reserve’s newly initiated open-ended quantitative-easing program, which some see as inflationary.
The market doesn’t seem too concerned about inflation appearing anytime soon. Five-year TIPS were trading at a real yield of -1.52% on Tuesday, implying expected inflation of just 2.1%.
The reason inflation isn’t an immediate concern today despite the Fed’s pumping money into the system is that the cash isn’t finding its way to consumers. Until that velocity of lending picks up, most economists don’t expect inflation to be a problem.
If you think inflation will be more than 2.1% over the next five years, short-term TIPS make a lot of sense, said Mr. Strauts.
While the new fund plugs a big hole in Vanguard’s fixed-income lineup, Mr. Strauts said there’s still some room for improvement. Emerging-markets debt is a particular area in which Vanguard is lacking, he said.
The company expects to launch an emerging-markets debt ETF and an international debt ETF early next year, Mr. Hoffman said.
Bond ETFs have been very popular with investors so far this year. They’ve had $39 billion of net inflows through August, $2 billion more than U.S. stock ETFs, according to Morningstar.