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Fund Family Shareholder Association
www.adviseronline.comTHERE IS NO WAY AROUND IT;
it’s
been an uninspiring first three years
for
Short-Term Inflation-Protected
Securities Index
. Following the fund’s
October 2012 launch, I suggested that
this little brother to the older, longer-
maturity
Inflation-Protected Securities
could be seen as a money market alter-
native for investors who didn’t have
an immediate plan to use their cash.
Vanguard said that the fund seeks to pro-
vide “protection from inflation.” Well,
the fund failed on both accounts.
Before diving into the numbers,
let’s briefly recap objectives. As the
name suggests, Short-Term Inflation-
Protected Securities Index tracks a por-
tion of the Treasury Inflation-Protected
Securities (TIPS) market. Holding
just 16 bonds, it aims to shadow the
Barclays U.S. Treasury Inflation-
Protected Securities 0–5 Year Index.
The rationale for owning a fund like
this is that you get a high-quality port-
folio of short-term Treasury bonds, plus
protection against inflation. Unique to
TIPS, each bond’s principal value is
adjusted every six months based on the
most recent inflation data. When infla-
tion is rising, the principal amount goes
up. Because the interest (or coupon)
rate remains constant, the income being
paid also increases. The idea is that
investors’ real returns, or returns above
and beyond inflation, should remain
constant.
The trouble is inflation protection
isn’t worth much when there is almost
no inflation to contend with. The enor-
mous decline in oil prices from over
$100 a barrel little more than a year
ago has been the leading reason that
headline consumer price inflation (CPI)
has been flat over the past 12 months.
The core CPI, which excludes vola-
tile food and energy prices to reflect
inflation trends, shows prices increased
1.9% over the past year. If oil just stays
at its current price, the gap between
headline and core CPI will narrow, but
that doesn’t mean inflation is roaring
back—merely that the price of oil is no
longer in decline.
When considering an inflation fund,
pay attention to the spread (or differ-
ence) between its current yield and that
of a Treasury fund with a similar matu-
rity. This spread tells you how much you
are paying for that inflation protection.
When the spread is small (i.e. the regu-
lar Treasury fund’s yield is only slightly
higher than the inflation fund’s yield),
people don’t expect much inflation
down the road, and insurance against
inflation is cheap. When the spread is
large, people are worried about future
inflation and you are paying a premium
for that inflation protection. Today the
difference in yield between Short-Term
Inflation-Protected Securities Index and
Short-Term Treasury is 0.28%, or 28
basis points, which is below average
and suggests insurance against inflation
is on sale.
Now let’s get back to the blood-
less verdict of the market. In the chart
above I’ve plotted the performance
of Short-Term Inflation-Protected
Securities Index relative to a number
of different competitors—both within
Vanguard and outside. When the line is
rising, Short-Term Inflation-Protected
Securities Index is outperforming.
As you can see, most of those lines
have trended downward. Short-Term
Inflation-Protected Securities Index’s
2.4% loss since inception trails
Prime
Money Market
’s fractional 0.1%
gain—so it hasn’t cut it as a money-
market alternative. It has also failed
to provide “protection from inflation”
despite the low 5.3% rise in prices
(using core CPI) we’ve seen over the
past three years. The bottom line is that
you would have been better off with
any of the other short-term bond sib-
lings, including
Short-Term Treasury
or
Short-Term Investment-Grade
, up
1.8% and 4.5%, respectively.
The one net positive: So far, the
fund has outpaced its actively man-
aged big brother, as Inflation-Protected
Securities is off 6.2% over the past
three years. The index fund has also
matched its direct ETF competitor, the
iShares 0–5 Year TIPS ETF (STIP),
step-for-step. So Vanguard’s indexing
team hasn’t dropped the ball here.
But maybe the best that can be
said for Short-Term Inflation-Protected
Securities Index is that its relative pros-
pects are looking better today than they
have at any point since its birth. As I
said earlier, insurance against infla-
tion is on sale. Additionally, October
is the third month in a row that the
fund has reported an SEC yield above
zero. It’s also the third straight month
where its yield has been higher than
Prime Money Market’s. Short-Term
Inflation Protected Securities Index’s
SEC yield of 0.22% is also on par with
Inflation Protected Security’s 0.26%
yield, despite holding shorter-maturity
bonds. What that tells me is that if you
are looking for protection from infla-
tion, you should lean toward the short-
maturity TIPS index fund.
Short-Term
Inflation-Protected
Securities Index has not delivered in
its first three years, but it is in a bet-
ter place today to serve as a money
market alternative over the next three
years. Still, for the cash you don’t
need immediately, why take the chance
on the fund finding its footing when
the tried-and-true option of Short-Term
Investment-Grade is available?
n
TIPS
No Inflated Returns
Short TIPS Falls Short
10/12
1/13
4/13
7/13
10/13
1/14
4/14
7/14
10/14
1/15
4/15
7/15
10/15
Rising line = Short TIPS is outperforming
0.80
0.85
0.90
0.95
1.00
1.05
1.10
Short-Term Treasury
Short-Term Investment-Grade
Inflation-Protected Securities
Prime Money Market
Core CPI
iShares 0-5 Year TIPS ETF (STIP)