Advanced TIPS Interview with John Hollyer, co-manager of the Vanguard TIPS Fund

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I had the pleasure of conducting an email interview with Vanguard Principal John Hollyer, co-manager of Vanguard Inflation-Protected Securities Fund. In this interview, John sheds some light, from an expert’s perspective, on the benefits and the risks of owning TIPS .

What do you consider the most important benefits of including TIPS in your portfolio?

There are two main benefits of TIPS bonds. The most unique features of TIPS are that they’re essentially a Treasury bond (Treasuries dominate the U.S. dollar market for TIPS), and secondly they’re indexed to inflation, so two of the key risks for bond investors — credit/default risk and inflation risk — are addressed by these securities. Read more about the benefits of including TIPS in your portfolio from the Interview with John Hollyer, co-manager of Vanguard Inflation-Protected Securities Fund.

Why should an investor choose a TIPS mutual funds versus individual TIPS?

What are the disadvantages of investing in a TIPS mutual fund as opposed to individual TIPS?

Can you tell us about the primary risks of investing in TIPS?

There are three primary risks of investing in TIPS. The first risk is that they are long-duration assets, meaning that they’re generally a longer-term bond (the average life of the TIPS market is about 10 years). While they’re indexed to inflation, they do have relatively high price sensitivity to changes in real interest rates (as with any bond, prices and interest rates/yields move in opposite directions)…Read more about the primary risks of investing in TIPS from the Interview with John Hollyer, co-manager of Vanguard Inflation-Protected Securities Fund.

How does the Vanguard Inflation-Protected Securities Fund differ from other TIPS funds?

One of the key themes that we have pursued since the fund’s launch nearly 10 years ago is that we really value those unique features that I touched on earlier: a TIPS market that is virtually a U.S. Treasury market (free from default risk) and the unique properties of TIPS bonds due to their inflation indexation… Read more about how the Vanguard TIPS fund differs from other TIPS funds from the Interview with John Hollyer, co-manager of Vanguard Inflation-Protected Securities Fund.

What factors do you look at to determine what individual TIPS are added to the Vanguard fund?

When buying TIPS for the fund, we start with the benchmark we seek to track, which is the Barclays Inflation Notes Index. That tells us essentially the composition of the TIPS market and that’s what our performance and risk measurement standard is… Read more about choosing TIPS from the Interview with John Hollyer, co-manager of Vanguard Inflation-Protected Securities Fund.

For an exectutive summary of interview with John Hollyer, co-manager of the Vanguard Inflation-Protected Securities Fund, read The Benefits and Risks of TIPS .