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Learning, Sharing, and Teaching => Investor Alley => Topic started by: webguy on February 12, 2015, 07:53:19 PM

Title: TIPS giving a negative return?
Post by: webguy on February 12, 2015, 07:53:19 PM
I'm heavily in stocks and am considering adding new 401k contributions to some bond funds. I have some exposure in a total bond fund but am looking at TIPS after just finishing chapter 2 of the Intelligent Investor book regarding inflation. I have a question though, the Vanguard page for their TIPS fund (https://personal.vanguard.com/us/funds/snapshot?FundId=1967&FundIntExt=INT) shows a yield of 0.12% and an expense ratio of 0.20%. What am I missing here? From first glance it looks as though I'm automatically losing 0.08% by just owning the fund, but I'm sure I must be overlooking something.

Any pointers would be appreciated!
Title: Re: TIPS giving a negative return?
Post by: Indexer on February 12, 2015, 07:56:08 PM
Yield is AFTER the expenses have been taken out.
Title: Re: TIPS giving a negative return?
Post by: robotclown on February 12, 2015, 09:24:28 PM
TIPS can actually have a negative return.  That's not what's happening in this case, but it is possible.
Title: Re: TIPS giving a negative return?
Post by: FFA on February 12, 2015, 10:58:26 PM
TIPS can actually have a negative return.  That's not what's happening in this case, but it is possible.

Yes exactly, especially when many economies are struggling to avoid deflation !
Title: Re: TIPS giving a negative return?
Post by: Norioch on February 13, 2015, 04:16:19 AM
This can happen, and it isn't completely absurd because TIPS are inflation adjusted. If you expect a lot of inflation and can't find any other investment that you think will even match inflation, then TIPS with positive nominal yield but negative real yield is still better than just holding cash. I've experienced this myself. I got lucky and bought a bunch of TIPS just before interest rates plummeted. The third-party value of the TIPS I owned shot up to the point where the profit I'd get from selling immediately was already higher than all of the interest I would make if I held the bonds to maturity. At the time I didn't know that TIPS could have negative interest rates, so I thought the situation was crazy, and I planned to sell my bonds and immediately turn around and use the money to buy newly issued TIPS. The problem was, after I sold, the newly issued TIPS all had negative interest rates. So I ended up using the money to buy index funds instead. It ended up working out quite well for me.
Title: Re: TIPS giving a negative return?
Post by: webguy on February 13, 2015, 04:57:42 PM
Thanks everyone for the explanation and links. Even though it's 0.12% after fees it still seems unintuitive to invest in when I'm getting 1% from my savings account. I understand that TIPS protect against inflation, but surely my savings account will also raise it's interest rate if inflation increases.  Also, wouldn't it make far more sense to invest in a blue chip stock which produces consumer goods (toothpaste, soap, etc) which pays a 3% dividend and will have some inflation protection built into it due to the type of goods it sells? Or am I missing some other key advantage of owning TIPS?
Title: Re: TIPS giving a negative return?
Post by: webguy on February 20, 2015, 01:49:07 PM
If anyone has any other advice for me regarding whether purchasing TIPS makes sense then I'd definitely appreciate it!
Title: Re: TIPS giving a negative return?
Post by: arebelspy on February 21, 2015, 08:18:31 AM

Thanks everyone for the explanation and links. Even though it's 0.12% after fees it still seems unintuitive to invest in when I'm getting 1% from my savings account. I understand that TIPS protect against inflation, but surely my savings account will also raise it's interest rate if inflation increases. 

I'm not sure you're understanding. Inflation is happening right now.

It's about 2%. So you're losing money in real purchasing power earning 1%. With TIPs as long as inflation is > the interest rate your bank is paying + costs to acquire, you'll come out ahead with TIPs. 

If inflation rises, there will be a lag with your bank to rise rates (they won't until they have to due to market pressures, otherwise they bank the difference as profits). So say inflation rises to 5%, your bank might eventually raise your interest to 2-3%.  While TIPs will have risen from 2-3% it's at now to that new 5% automatically, immediately.

I'm not saying TIPs is what you should invest in, I don't know your situation, but I am trying to explain why it's better than you seem to be giving it credit for.