TIPS

Treasury Inflation-Protected Securities (TIPS) based mutual funds and ETFs invest primarily (more... Treasury Inflation-Protected Securities (TIPS) based mutual funds and ETFs invest primarily (more than 90% of their assets) in inflation-protected debt issued by the U.S. government, which is one of the largest issuers of this type of debt. They can be purchased with maturities of 5, 10 and 30 years. As with the other kinds of debt it issues, the U.S. government issues TIPS to help fund its different services and programs. What makes TIPS unique is that their original principal is adjusted based on changes in inflation, typically measured by the Consumer Price Index (CPI), meaning the original principal can increase with inflation or decrease with deflation. Usually TIPS pay a fixed interest, twice a year, to the adjusted principal, and on maturity investors receive the higher of the original or adjusted principal. As a result, TIPS are often purchased by investors willing to own government bonds but are also fearful of inflation wiping out part of their investment. For example, let’s say someone buys a TIPS that pays 2% interest, but inflation ends up being 4%. With a traditional government bond, the investor would lose money in real terms (i.e. after taking inflation into account), but with a TIPS, the principal would be adjusted upward to compensate for the rise in consumer prices. TIPS are considered a conservative investment, as investors are confident that the U.S. government will be able to meet its interest and principal obligations, irrespective of inflation. Last Updated: 12/01/2023 View more View less

Treasury Inflation-Protected Securities (TIPS) based mutual funds and ETFs invest primarily (more than 90% of their assets) in inflation-protected debt issued by the U.S. government, which is one of the largest issuers of... Treasury Inflation-Protected Securities (TIPS) based mutual funds and ETFs invest primarily (more than 90% of their assets) in inflation-protected debt issued by the U.S. government, which is one of the largest issuers of this type of debt. They can be purchased with maturities of 5, 10 and 30 years. As with the other kinds of debt it issues, the U.S. government issues TIPS to help fund its different services and programs. What makes TIPS unique is that their original principal is adjusted based on changes in inflation, typically measured by the Consumer Price Index (CPI), meaning the original principal can increase with inflation or decrease with deflation. Usually TIPS pay a fixed interest, twice a year, to the adjusted principal, and on maturity investors receive the higher of the original or adjusted principal. As a result, TIPS are often purchased by investors willing to own government bonds but are also fearful of inflation wiping out part of their investment. For example, let’s say someone buys a TIPS that pays 2% interest, but inflation ends up being 4%. With a traditional government bond, the investor would lose money in real terms (i.e. after taking inflation into account), but with a TIPS, the principal would be adjusted upward to compensate for the rise in consumer prices. TIPS are considered a conservative investment, as investors are confident that the U.S. government will be able to meet its interest and principal obligations, irrespective of inflation. Last Updated: 12/01/2023 View more View less