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Any thoughts on adding small position LT Tips Fund to a fixed income portfolio?

edited January 2015 in Fund Discussions


  • I currently do not have any tips, and was considering adding a small position as well, but not sure whether to go with short, intermediate or long term.
  • a. You should be aware of the tax treatment of TIPS - which makes them better in an IRA or 401k. Suppose a TIPS is bought when it is issued (say, at 100) and it has a 1% coupon. In the first year suppose that there is 2% inflation. You will receive the 1% coupon, and in the following year the Treasury will pay 1% on the inflated principal (of $100 + $2 in inflation = $102.) So, in the second year your interest payment is 1% of $102 or $1.02. This is all terrific --- EXCEPT that the 2% increase in the principal value is taxable as income in the year you receive it.
    In other words, in the first year you get $1.00 in income and pay taxes of income of $2.00 ----- so owning TIPS in a tax sheltered account is preferred.

    b. That said, the theory says that
    income of plain vanilla Treasury =
    income on TIPS of that maturity
    + expectation of inflation for that period.

    The problem is that you can be caught/rewarded between inflation and Treasury rates going up at different rates (or on the market not doing what the theory says it will.)
  • I was mostly concerned with longer term since LTPZ has over 90 % in TIPS in years 2040+. Going to be very volatile and I guess if you hold long enough, no losses. Yes in an IRA and retired. But I won't be around around after 2040. Seems like a good year to own some, but who know about the future.
  • edited January 2015
    Hi @ron

    Just my opinion at this time. We have held active managed TlPs funds, including LTPZ.

    These funds have their periods of in and out of favor, not unlike equity funds. I have not performed a chart study recently, but one will likely discover more swings with the TIPs funds area than with corporate bond holdings. Obviously, these two bond types are supposed to provide somewhat different functions.

    I have noted here several times in the past years that the greatest impact in pricing for TIPs that remains in place is the yield of other gov't. issues and that these bonds also become a flight to safety device when folks are not happy with other market sectors.
    This is only my opinion, of course.

    We have not invested in TIPs for any relation to receiving income from the investment; but to obtain capital appreciation from pricing. We have not used this area as a long term holding; and from my recall, we have not held TIPs for more than a year, during the last 5 or 6 years.

    EDV ,TLT ,LTPZ follow the long term gov't. bond pricing. TIP and other TIPs active managed funds tend to follow the middle dated yield/pricing of gov't issues.
    All of these had a bad 2013 period, as they followed the gov't longer dated issues.

    EDV is the hot dog in this area for both the up and the down, slightly followed by TLT and LTPZ. EDV would be my choice, next would be LTPZ in the TIPs area.

    As to active managed TIPs funds, they are pretty much in line with TIP for the longer term, but vary on a shorter term as the managers move around the duration ranges and in many cases also hold corp. bonds as well.

    Ron, you noted LTPZ in particular; so I presume you have access to EDV as well.

    For our house, we do our best to either purchase a 5% position on day one or at least obtain this percentage within a month's time with an average in once a week. Otherwise, we don't feel the holding has enough effect upon a portfolio.

    Lastly, is how long is this down trend going to stay in place relative to bond yield? A real head scratcher. And that the etf's discussed above can and do move as much as a speciality equity sector. One should watch them for price movements, IMO. These will not neccessarily behave like a smoother, well managed corp. bond fund.

    I probably forget something........will add later if needed; as I have to be away for a few hours tonight.

    Don't forget, lest I get dragged across the carpet. These are only my views/opinions.

    Take care,
  • ron, if EDV interests you and you want to stay with PIMCO, I think that ZROZ is comparable or better (as you may know).
  • @Tony
    Thanks......forgot about that one at Pimco.
  • I would avoid TIPS funds and ETFs. If I wanted TIPS, I would buy them directly. That way you are in control of individual maturities. But even then, I would not be interested.
  • Hi @BobC

    Yes, but one is limited to a dollar purchase amount.

    For our portfolio we want the flexibility of larger dollar amounts to invest, and more importantly to move out of the position as we choose. TIPs, either long or short duration do have their cycles, too; not unlike any other bond or equity.

    Question: Is there more to controlling the maturity range that you don't like about TIPs funds of ETF's. One can control the maturity range with TIPs etf's, yes?
    Pimco has 2 such choices: STPZ, LTPZ . Active managed funds generally have a mix slanted to one direction or the other as management determines.


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