Over a very long time-frame (say 30+ years), they should be near-equivalent. In the short-term there can be differences because a TIPS fund is subject to NAV fluctuations due to interest rate changes just like any other bond fund, whereas a ladder of individual TIPS hides such fluctuations (they're present and you'd know about it if you were forced to mark the individual notes in your ladder to the daily market price like a fund has to). Those hidden fluctuations don't matter so much if you hold all the notes to maturity, but you have reinvestment risk as the base interest rate will change each time a note in the ladder matures and has to be re-invested (presuming it's a rolling ladder, very much like a bond fund).I think I understand how owning a TIPS bond and holding to maturity provides inflation protection. I don't understand TIPS funds as well. Do TIPS mutual funds and ETFs accomplish that same function? If so, how does that work? Thanks.
You could just buy a set of 30-year TIPS and not worry about reinvestment risk if you had enough capital to fill it out as far as you want to go (retirees generally wouldn't go past 30 years, so other notes/bonds in the ladder would be lesser maturity). Of course 30y T-Bonds generally pay lower base interest than intermediate-term T-Notes.
Speaking of just buying 30y TIPS, Allan Roth's ETF Proposal to the Industry discusses him dropping $1M to build his own 30y TIPS ladder and the minor issues he ran into while trying to do that.
...there were a few issues building my TIPS ladder myself (and with clients) that could be solved by an ETF such as the SWR ETF I’m proposing:
1) It was complex and took hours to buy each of these bonds, with many of the trades not going through the first time.
2) The bid/ask spreads from buying a very small number of bonds were large and therefore took from returns.
3) While the cash flows average 4.38%, from buying a small number of bonds, the annual payouts varied a bit from that average. You can’t buy fractional amounts of TIPS as you can in a fund.
Statistics: Posted by bonesly — Wed Aug 21, 2024 6:18 pm — Replies 3 — Views 137