Inflation buster

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Vanguard TIPS Fund Offers Hedge on Inflation and Safety of Cash

Vanguard has long been a leader in low-cost mutual funds, and now is breaking into the low-cost exchange-traded funds industry, too. This week Vanguard rolled out a short-term TIPS ETF to further that mission.

Today, Vanguard is launching the Vanguard Short-Term Inflation-Protected Securities Index Fund (NYSE:VTIP), which tries to reflect the performance of the Barclays U.S. Treasury Inflation-Protected Securities 0-5 year index. The index holds inflation-protected public obligations of the U.S. Treasury that do exactly what the name implies — they are securities pegged to inflation. The par values of TIPS are tied to the the Consumer Price Index and adjusted semi-annually, while their interest rate remains fixed.

This is an investment that has big potential for investors looking for very-low-risk places to put their money, according to Vanguard expert Dan Wiener:

According to the fund’s “overview” page, Short-Term Inflation-Protected Index has a “Risk potential” of 1, or Less risk, Less reward. Other funds with this same rating include the Vanguard  Federal Money Market Fund (MUTF:VMFXX) and the Vanguard Short-Term Treasury Fund (MUTF:VFISX) to name a couple. Vanguard says it earns this rating because “share prices are expected to remain stable or to fluctuate only slightly. Such funds may be appropriate for the short-term reserves portion of a long-term investment portfolio, or for investors with short-term investment horizons (three years or less).

Why is this important? Because I believe this short-term inflation fund can be used as a money market alternative for investors who have cash holdings earning yields as low as 0.01% but which aren’t necessary for day-to-day expenses. Obviously the fund’s value will fluctuate, but consider that if Short-Term Inflation-Protected Index does its job, money invested here will, at a minimum, retain its purchasing power while cash in a money market almost certainly will not.

In other words, this is not an investment that has a lot of growth potential. It’s simply a bulletproof place to park your cash that is an alternative to a savings account or just stuffing money under your mattress. With this Vanguard TIPS fund, you will be able to watch your funds keep up with inflation instead of seeing your cash slowly lose value with time.

Especially since QE3 and central bank policy lately seems to be unconcerned with inflation in the interest of stimulating employment and the economy.

Vanguard is well known for its low-cost index ETF products. Its ETF offerings have an average expense ratio of 0.17%, whereas the industry average is around 0.55%. This TIPS fund has an expense ratio of just 0.1% — meaning you pay just $10 in fees for every $10,000 invested.

This is a good alternative, but there are risks as Dan Wiener points out:

I would not jump into this fund until it has some assets under its belt and has begun building its portfolio out and trading volume builds. Also, avoid the mutual fund shares which come with a 0.25% front-end load. Instead, when you do invest stick with the ETF shares, ticker VTIP, which are traded free-of-charge if you are a Vanguard Brokerage investor.

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Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

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Comments
  • http://www.facebook.com/people/Dirk-Ming/100003269183734 Dirk Ming

    There is interest rate and deflation risk. It suits well for long term investors, but not short.