"Like other US Treasuries, Treasury Inflation Protected Securities (TIPs) have virtually no credit risk," explains fund expert Mark Salzinger.
The editor of The No-Load Fund Investor adds, "Unlike other US Treasuries beyond short-term bills, however, TIPs also have no inflation risk." Here, he looks at an EYF based on TIPs.
"Twice a year, TIPs' principal valuis are adjusted upward by the amount of the increase in the Consumer Price Index Urban (CPI-U), thus protecting their holders against increases in inflation.
"The total return of the bond equals its yield plus the change in principal value based on inflation, changes in real interest rates (published interest rates minus inflation) and supply-demand in the market for TIPs.
"TIPs' yields are lower than those of regular Treasury sercurities of similar maturities. That's one of the disadvantages of TIPs.
"The other is that any increase in principal value due to the biannual inflation adjustment gets taxed every year as if it were received income.
"We favor TIPs when we believe that inflation over a period of five to ten years will be higher than the market expects. As of October 1, 20008, 10-year TIPs had a yield of 2.18% vs.3.66% for regular 10-year Treasuries.
"That means fixed-income investors expect the CPI-U to increase only by about 1.5% a year over the next 10 years. However, we believe that inflation is likely to be considerably higher than that over the period.
"While the credit crisis and the recent, substantial drops in most commodity prices will limit inflation over the short term, global growth in demand over the next decade is very likely to contribute to an increase in inflation in the US over the longer run.
"Also, TIPs provide extensive diversification benefits. According to the US Treasury, they have proviceed slightly negative correlation to the S&P 500 and to the US dollar (tending to inch up in price when the stock market or the dollar falls).
"And because of their inflation protection, they should have less volatility over the long run than regular Treasury securities of similar maturities.
"In our model retirement portfolio, we are establishing a new position in the iShares Lehman TIPs Bond (ASE: TIP) exchange-traded fund.
"The ETF can be bought just like a stock. Though there will be a commission, the miniscule expense ratio of this ETF (only 0.20%) quickly makes up for that, as most conventional TIOPs funds have much higher expense ratios.
"We also note that while the ETF replicates an index designed by Lehman Brothers, Barclays Global Investors acquired Lehman's indexing group in September and actually 'manages' the ETF."
Steven Halpern's TheStockAdvisors.com offers a daily look at the latest market commentary and favorite stock picks and investment ideas from the nation's leading financial newsletter advisors.
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Reader Comments (Page 1 of 1)
10-22-2008 @ 1:53PM
BHarrison said...
It appears that we have entered a "no-win" situation for the average American, and for those who were invested in the makets.
The cost of living is rapidly escalating, salaries are stagnant, inflation is fully anticipated to escalte appreciably, and there will be millions of unemployed Americans, many of whom may lose their homes and go into bankruptcy . . . etc., etc., etc.
To "save the economy" the Fed is reducing the interest rates to promote business; however, this undermines the effective value of those who have savings and investments . . . it is a "catch-22" situation.
So, "to cure the disease . . . they are kiliing the patient . . . with a slow and painful demise . . .". Our world will never be the same as it was. President Bush and Congress were the "GATE KEEPERS" responsible for the integrity and stability of our economy . . . they greviously FAILEd to perform their fiduciary duties; and THEY are in charge of this "recovery".
Obama has staff and ties to Fannie & freddie . . . John McCain's Chief Economic Advisor is none other than Phil "Americans are Whiners" Gramm, who notorirously the guy responsible for the DEREGULATION of the CDSs and CDOs
Unlike the German government, there has been no requirements issued by the US government to 1) cap corporate salaries, or 2) to FREEZE "bonuses or other 'extra compensations' " to corporate managment.
How can there be ANY INTEGRITY to the proposed solutions and "recovery" that is being led by these corrupt individuals?
It is imperative that both the RNC & the DNC be wrest from the control of the special interests groups, and that the vast MAJORITY of Congressmen/women be thrown out of office.
The damage has ALREADY been committed, the horrific fallout is occuring and unstoppable . . . our future depends upon the American people demanding INTEGRITY in our government and business.
How can there be any