How does TIP ETF work?

[sailinlight]

From the sale of some properties, I'll have about $450k to park until finding new places to invest. With asset prices so high right now, I suspect that it could take quite a long time, maybe years to find a good deal. I'd like it to be protected from  sudden market drops in case I need to pull it out in short notice, but am worried about inflation eating away at it.
Can anyone help me understand how the TIP ETF works? It looks like it pays a dividend monthly, I assume this is based on what TIPS are paying which makes sense, but what sets the price of the ETF? It looks like over the past year it's bounced up and down around 5%. It doesn't seem like a good inflation hedge if the dividend is ~3% but the price drops 5% you'd be better in cash.

[sailinlight]

Bump. anyone?

[Telecaster]

I'm not sure what problem these things solve.  The price and therefore the volatility is determined by interest rates.   Interest rates are related to inflation, but not the same thing.

I don't know of anything that will do what you need it to do.   Regular TIPS will beat inflation and are attractively priced right now, but there is a penalty for withdrawal before the term.  A regular bond fund will be more liquid, but likely will lose to inflation.   Sorry I can't be of more help. 

[sailinlight]

I guess that was my question. So basically the ETF is like a bond fund that adjusts price based on prevailing interest rates. Thanks

[dandarc]

I'm sure works like most other ETFs - if the underlying bucket of assets price diverges too far from the price of the ETF, the large trading houses that have the resources to be allowed to do this sort of thing will notice and take advantage, which nudges the price back to aligning with the NAV.

1. buy the TIPS bond to match the portfolio the ETF holds
2. exchange those bonds for shares of the ETF
3. sell the ETF if the ETF

is the process if the ETF is overpriced relative to NAV. The opposite if underpriced.

Dividends just flow through like a mutual fund - if you're holding a share of the ETF on the right date, you get the dividend, if not you get nothing.

[Radagast]

I guess that was my question. So basically the ETF is like a bond fund that adjusts price based on prevailing interest rates. Thanks

It is a little more complicated, because it adjusts both on expected and realized inflation, and also on its price relative to vanilla treasury bonds (why buy TIPS if regular government bonds pay more?). Otherwise its price is set like any other ETF.

For intermediate term objectives VTINX (Vanguard Target Retirement Income) is a good choice. It is 70% bonds 30% stocks, consisting of five funds including US and International stocks and bonds plus a TIPS fund, which makes it very well diversified and with a high risk versus return. Another good one would be VWALX (High Yield Municipal Bond), which has actually been very similar to VTINX, and probably better after paying taxes on VTINX.