Vanguard Inflation-Protected Securities Fund
From Bogleheads
| Company: | Vanguard |
|---|---|
| Fund category: | US Bond |
| Benchmark: | Barclays Capital U.S. Treasury Inflation Protected Securities Index |
| Start date: | 06/29/2000 |
| Expense ratio: | 0.20% |
Vanguard Inflation-Protected Securities Fund is a Vanguard mutual fund which invests in Treasury Inflation Protected Securities (TIPS). From the fund's prospectus:
The Fund invests at least 80% of its assets in inflation-indexed bonds issued by the U.S. government, its agencies and instrumentalities, and corporations. The Fund may invest in bonds of any maturity; however, its dollar-weighted average maturity is expected to be in the range of 7 to 20 years.
The Fund Holdings page on the Vanguard website reports that as of 09/30/2008, the fund invests in 24 TIPS bonds, with maturity ranging from 2010 to 2032.
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Share Classes
Two share classes are available to individual investors:
- Investor (VIPSX), with an expense ratio (ER) of 0.20% and an initial minimum investment of $3,000
- Admiral (VAIPX), with an ER of 0.11% and a minimum investment of $100,000, except $50,000 suffices for conversion of an Investor Shares account in existence 10 years
One additional share class is offered through some workplace retirement plans:
- Institutional (VIPIX), with an ER of 0.08%
Advantages
True to Form
Vanguard Inflation-Protected Securities Fund invests only in TIPS. Other funds, for example Fidelity Inflation-Protected Bond Fund (FINPX), include other assets in their portfolios.
Low Costs
Expenses have a more noticeable effect on performance for fixed income funds than for equity funds, since fixed income has lower expected returns, as well as less opportunity for managers to impact absolute results. Vanguard Inflation-Protected Securities Fund's rock-bottom fees thus serve its shareholders well.
Criticisms
Taxes
If you hold TIPS, or a TIPS fund, in a taxable account, you pay tax every year on both the interest payment and the inflation adjustment. The tax on the inflation adjustment means that you do not get a fixed after-tax return above inflation. Therefore, TIPS are best held in a tax-deferred account such as an IRA. If you must hold inflation-linked bonds in a taxable account, you might consider I bonds instead; see I Bonds vs TIPS for more details.
Alternative of holding bonds directly
You can avoid ongoing management fees by purchasing TIPS through TreasuryDirect (taxable accounts only) or through a brokerage account. By holding a mutual fund, you pay a small fee for the fund to manage the bonds. However, in return for that fee, you gain the opportunity to automatically reinvest the distributions, buy more bonds in any amount at any time rather than waiting for a new issue, and buy and sell the fund at the market price rather than paying a commission and bid/ask spread to trade actual bonds on the market. See Individual Bonds vs a Bond Fund for detailed comparisons.
Performance
This historical returns webpage provides VIPSX performance for each of the 8 full calendar years it's been in existence. During this 2001-2008 period, the fund had an average annualized return of +6.71% compared to the annualized +6.92% return of its benchmark index. The fund's best calendar year (2002) resulted in a +16.61% return; its worst returned -2.85%% (2008). The fund's tracking error relative to its benchmarkhas varied from -0.50% (2008) to +0.04% (2002).
The fund distributes both the coupon interest income as well as the inflation adjustment to principal as income distributions. Thus, to assure inflation adjusted principal, an investor would need to reinvest the inflation adjustment dividend back into the fund. The history of coupon and inflation adjusted dividends for the fund can be found at Important Information About Vanguard Inflation-Protected Securities Fund Investor Shares Distributions.
Since this fund came out in 2000, real interest rates have had a general downward trend. Fund performance has benefited from this movement. Whenever this trend reverses, the fund's performance, as in 2008, will be negatively impacted.
Vanguard Institutional reports updated three year standard deviations of monthly returns. This measure of return volatility shows the fund had a 7.45% standard deviation compared to the 7.43% standard deviation of the benchmark as of 11/31/08.
History
Inception dates of Vanguard Inflation-Protected Securities Fund's various share classes are as follows:
- Investor: 06/29/2000
- Institutional: 12/12/2003
- Admiral: 06/10/2005
In May 2007 Vanguard filed for an ETF share class of Inflation-Protected Securities, as reported in the IndexUniverse.com article Vanguard Plans Active Bond ETF. The share class has yet to be created.
The fund's fiscal year ends on 12/31 of each year.
Links
See also
