You’ve probably heard or read about the current measures of inflation by now. At levels that we have seen for the first time in almost 40 years, the stock market has reflected the fears of a possible recession this year. With many people concerned about losing account value in today’s market, many investors wonder where they can place their money to protect themselves during this time. Who needs some TIPS?
TIPS, formally known as Treasury Inflation-Protected Securities, are fixed income securities that are indexed to the current level of inflation in order to protect the purchasing power of an investor’s money. The principal, or original sum of money invested into the securities, grows as inflation increases. This differs greatly from conventional fixed income securities in which prices fall, but yields rise. Since the principal rises as a result of inflation, the coupon, or interest rate applied to the securities, will adjust in conjunction with the principal and investors will receive larger returns on their investment. Simply put, as long as inflation increases, TIPS provide investors with protection and possible increased profitability.
For example, say that you originally bought $1,000 in TIPS with a coupon rate of 3%. If inflation rises by 5% in that year, the principal that you paid for the TIPS increases to $1,050. The interest rate remains at 3%, but now you will receive $31.50 in interest for the year rather than $30 if you invested in a conventional fixed income asset. This incentivizes investors to invest in TIPS during inflationary periods, including the market downturn that we are experiencing this year.
While TIPS offer many incentives to their investors, there are also some negative aspects that come with them. For one, most interest rates on TIPS are significantly lower than those of fixed income securities. For investors who may have greater risk tolerances and look to seek higher returns, TIPS may not be the ideal choice. Moreover, since inflation adjustments of TIPS bonds are taxable income according to the IRS, it may create a larger tax bill if such ramifications are a concern to you.
Within the MVT Common Fund, the Schwab U.S. TIPS ETF (SCHP) tracks the total return of the Bloomberg U.S. Treasury Inflation-Linked Bond Index to provide investors with exposure within the TIPS market. With an expense ratio of just .04%, this ETF invests in a diversified blend of TIPS securities at an overall cost-effective rate. Focusing on our beliefs of safety of principal, diversification, and liquidity, we believe that SCHP aligns with our core values and provides investors within the MVT Common Fund protection against inflationary pressures.
About the Author
Dylan Fisher is graduating from the University of Illinois Chicago with a degree in finance this December. He is an Investment Analyst at MVT who joined us as an Investment Intern in April of this year. He chose to work at MVT because he enjoys the close knit environment of the firm and the opportunity to grow within the financial industry.
Before joining the firm, Dylan gained experience as an investment analyst for the Portfolio Management Team at UIC. Within the club, his current role is to assist the healthcare sector in analyzing and selecting the holdings within the club’s overall portfolio.
Dylan currently resides in Chicago. In his free time, Dylan enjoys playing basketball, collecting vintage clothing, and spending time with his family.