CORRECTION: Protecting Against Tariff Induced Inflation

Comments

• yogibearbull

  July 2

  TIPS have features that are realized only when held to maturity. They pay inflation-adjusted principal at maturity. So, when held to maturity, they deliver CPI plus tiny base interest. TIPS ladders can be effective.
  
  Funds may be wrong vehicles for TIPS:
  
  1. Funds don't mature & the benefit from the main feature of TIPS is lost in TIPS funds (OEFs or ETFs).
  
  2. TIPS funds also have strong duration effect. While this applies to TIPS ladders too, there is the (preferred) option to hold components to maturity.
  
  3. TIPS funds have to distribute inflation adjustments annually - whether earned or not. So, if there aren't enough inflows, some holdings must be sold to pay required distributions.
  
  
• Sven

  July 2

  Thanks @lynnbolin2021 and @yogibb.
• lynnbolin2021

  July 5

  @yogibearbull, thanks for your insights on inflation protected bonds. I have a couple questions or comments. My bond ladder currently consists of Treasuries, Agency, and investment grade bonds. My objective is to simplify and not buy any more individual securities.
  
  Vanguard short-term inflation protected bond fund (VTAPX) has 20% of its bonds with maturities of 0-1 year. It follows an indexing strategy of buying bonds each quarter so that some mature each quarter. While I did not find any mention in the literature of holding until maturity, I presume that a bond that matures this quarter is held until maturity.
  
  https://investor.vanguard.com/investment-products/mutual-funds/profile/vtabx#portfolio-composition
  
  Regardless, short-term inflation protected bonds have performed much better than short-term Treasuries over the past five years.
  
  https://www.mutualfundobserver.com/2025/07/protecting-against-tariff-induced-inflation/
  
  The BlackRock iShares iBonds ETFs buy inflation protected bonds to replicate a rung on a bond ladder so individual inflation protected bonds mature at a specific date and the investment is returned at a specific date. For example, iShares iBonds Oct 2030 Term Tips ETF (IBIG) holds three inflation protected bonds with maturities between January and July 2030 and the fund is terminated in October 2030. For me, the simplicity outweighs disadvantages.
  
  https://www.ishares.com/us/products/333128/ishares-ibonds-oct-2030-term-tips-etf/
  
  Regards
  
• yogibearbull

  July 5

  @lynnbolin2021, I am fine with informed decisions. Many bought TIPS funds without knowing the intricacies and then complained when they didn't perform as they expected during credit crunches.
  
  Morningstar recommends all funds all the time - that was its origin. But even M* relented recently that TIPS ladders may be better than TIPS funds,
  https://www.morningstar.com/funds/ladder-up-investors-should-reconsider-how-they-use-tips-funds
  More https://ybbpersonalfinance.proboards.com/post/2057/thread
• sma3

  July 5

  I believe using traditional OEF for TIPS negates their primary advantage, which is guaranteed inflation adjusted return year after year. Much better to use either the ETFs that terminate in a specific year of design you own TIPS ladder
  
  https://www.tipsladder.com/
  
  Single best source for information on TIPS.
  
  https://tipswatch.com/
  
  
  
  
• Level5

  July 5

  Since as a fund, BlackRock iShares iBonds ETFs (and other target date bond etfs) can be sold by investors at any time, wouldn’t that be a drag on returns?
• msf

  July 5

  Typically OEFs keep a small amount of cash around to deal with potential redemptions. This creates the cash drag you're referring to. But ETFs trade on the secondary market and are not redeemed directly with the fund. So they may not have this cash drag.
  
  ETF creation units are generally exchanges "in kind" (i.e. not cash transactions). So even Authorized Participant redemptions don't deal (much) with cash.
  
  There may be a small cash component in the basket to deal with price fluctuations or liquidity constraints. For example, ICI's FAQ on ETFs says:

  At times, baskets may be limited to a subset of the ETF’s portfolio and contain a cash component. For example, the composition of baskets for bond ETFs may vary from day to day with the mix of cash and the selection of bonds in the baskets based on liquidity in the underlying bond market.
• lynnbolin2021

  July 6

  Thanks for the great discussion, perspectives, and information. I have read opinions that because of the rising national debt and tariffs that the US may be headed for more frequent bouts of inflation. I am currently reading, "Our Dollar, Your Problem" by Kenneth Rogoff. I will be adding more inflation protected bond ladder ETFs to my bond ladder.