Is VTIP the best bond option right now?

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CIPHERSTONE
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Is VTIP the best bond option right now?

Post by CIPHERSTONE »

Came into possession of an inherited IRA this year, looking to satisfy the bond portion of the 3 fund portfolio. Looking at some of the available options with bond fund returns being in the negative, Vanguard Short-Term Inflation-Protected Securities Index Fund ETF Shares VTIP looks like a very stable option that offers positive returns right now.

I was wondering what the downside to VTIP is? I was looking at VBTLX (Vanguard Total Bond Market Index Fund) which a lot of bogleheads have recommended. Really appreciate the replies.

UPDATE:
Would just like to thank everyone for their insights/thoughts. I decided for the time being to go with Vanguard Intermediate-Term Bond Index Fund Admiral Shares (VBILX). It felt like a middle of the road choice between a pure treasuries fund and one that was comprised of treasuries/corp/mortgage based investments (VBILX is treasuries/corp). Having a forum like this and people with experience to bounce my noob questions off really is such a fantastic resource. Honestly as an investor you have helped calm so many jittery fears/answered so many questions. I am in your debt.
Last edited by CIPHERSTONE on Fri Sep 17, 2021 8:35 am, edited 1 time in total.
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dbr
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Re: Is VTIP the best bond option right now?

Post by dbr »

There is no such thing as a best option in general for bonds now or any other time.

Your bond choice should consider your total portfolio properties considering the time line for which you are invested. Trying to predict near term results for a specific investment at a specific time is probably not advised.

For long term investors holding a stock and bond portfolio most likely a generic choice that makes sense is any low cost intermediate term fund.

If the money in question has been specifically saved for a particular time and purpose the answer might be different.
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Re: Is VTIP the best bond option right now?

Post by z3r0c00l »

I don't think -2.24% SEC yield before inflation adjustment makes this a good option. Really this is a very specific ETF for very specific needs and I would posit that many (most?) individual investors who are not wealthy should look elsewhere for better options. My perennial recommendation if you are worried about inflation would be I bonds. If you are agnostic to future inflation, not knowing which way it will swing, I think a total bond fund might be the better choice if you want a bond fund in the first place. The longer duration and mix of bond types means it is more likely to offer higher return over long spans of time. Right now I bonds are beating them both handily but total bond did better for many years prior.
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dbr
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Re: Is VTIP the best bond option right now?

Post by dbr »

z3r0c00l wrote: Thu Sep 16, 2021 8:45 am I don't think -2.24% SEC yield before inflation adjustment makes this a good option. Really this is a very specific ETF for very specific needs and I would posit that many (most?) individual investors who are not wealthy should look elsewhere for better options. My perennial recommendation if you are worried about inflation would be I bonds. If you are agnostic to future inflation, not knowing which way it will swing, I think a total bond fund might be the better choice if you want a bond fund in the first place. The longer duration and mix of bond types means it is more likely to offer higher return over long spans of time. Right now I bonds are beating them both handily but total bond did better for many years prior.
I bonds have some attractive positioning right now, but the fixed rate is still very low so on the longer times scale I am not sure this is something to load up on. But it may be academic as the purchase limits prohibit moving much of any existing money to I bonds. It might make sense to start a program of building an I bond position. Also note the purchase limit removes optionality. You can't sell older lower paying I bonds to buy new ones at a higher rate when that eventually happens unless you are talking about pretty small holdings.

Even so I bonds should always be considered.
homebuyer6426
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Re: Is VTIP the best bond option right now?

Post by homebuyer6426 »

I recently replaced the bonds in my portfolio with Japanese stocks. TIPs were something I was considering, but found underwhelming.

Of course I doubt it will reduce volatility, but I'm okay with that. I'm mainly trying to hedge against inflation.
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CIPHERSTONE
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Re: Is VTIP the best bond option right now?

Post by CIPHERSTONE »

z3r0c00l wrote: Thu Sep 16, 2021 8:45 am I don't think -2.24% SEC yield before inflation adjustment makes this a good option. Really this is a very specific ETF for very specific needs and I would posit that many (most?) individual investors who are not wealthy should look elsewhere for better options. My perennial recommendation if you are worried about inflation would be I bonds. If you are agnostic to future inflation, not knowing which way it will swing, I think a total bond fund might be the better choice if you want a bond fund in the first place. The longer duration and mix of bond types means it is more likely to offer higher return over long spans of time. Right now I bonds are beating them both handily but total bond did better for many years prior.
But your limited to $10k per year for I bond per person correct? I'm retiring in 8-10 years. I'm not a savvy investor, but I'm trying to follow the boglehead 3 fund portfolio for this account, the choice for the "Bond" portion is something I don't feel like I can get any firm answer /direction on.
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Re: Is VTIP the best bond option right now?

Post by retired@50 »

CIPHERSTONE wrote: Thu Sep 16, 2021 8:55 am I'm not a savvy investor, but I'm trying to follow the boglehead 3 fund portfolio for this account, the choice for the "Bond" portion is something I don't feel like I can get any firm answer /direction on.
The answer hasn't changed. If you're investing with Vanguard funds, it's still Total Bond Market Index Fund (VBTLX) or its ETF share class BND.

See link: https://www.bogleheads.org/wiki/Three-fund_portfolio

From the wiki:
A three-fund portfolio is a portfolio which uses only basic asset classes — usually a domestic stock "total market" index fund, an international stock "total market" index fund and a bond "total market" index fund. It is often recommended for and by Bogleheads attracted by "the majesty of simplicity" (Bogle's phrase), and for those who want finer control and better tax-efficiency than they would get in an all-in-one fund like a target retirement fund.
If you're investing with another firm's funds or ETFs, then check the wiki for comparable tickers to use.

Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
dbr
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Re: Is VTIP the best bond option right now?

Post by dbr »

CIPHERSTONE wrote: Thu Sep 16, 2021 8:55 am But your limited to $10k per year for I bond per person correct? I'm retiring in 8-10 years. I'm not a savvy investor, but I'm trying to follow the boglehead 3 fund portfolio for this account, the choice for the "Bond" portion is something I don't feel like I can get any firm answer /direction on.
Correct. There is no firm direction on it. The reason the standard idea for the three fund portfolio just says buy US total bond fund is that this shortcuts any debate about what to do and has little basis for ever being actually wrong.

There are more choices in bonds than there are reasons to choose among them.

But, what again was your reason for not wanting to hold total bond? If you are thinking that is somehow a bad idea, especially a "bad idea right now" you are probably rejecting part of the whole concept in the three fund portfolio for long term investing.

Disclaimer: I hold intermediate Treasuries and Intermediate TIPS, but that is not because I think total bond is a bad idea. In any case I argue that my choice for the long run is effectively a three fund concept. I have held that position more or less since TIPS were first issued. That was 1997 and VIPSX first issued in 2000.
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CIPHERSTONE
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Re: Is VTIP the best bond option right now?

Post by CIPHERSTONE »

dbr wrote: Thu Sep 16, 2021 9:08 am
CIPHERSTONE wrote: Thu Sep 16, 2021 8:55 am But your limited to $10k per year for I bond per person correct? I'm retiring in 8-10 years. I'm not a savvy investor, but I'm trying to follow the boglehead 3 fund portfolio for this account, the choice for the "Bond" portion is something I don't feel like I can get any firm answer /direction on.
Correct. There is no firm direction on it. The reason the standard idea for the three fund portfolio just says buy US total bond fund is that this shortcuts any debate about what to do and has little basis for ever being actually wrong.

There are more choices in bonds than there are reasons to choose among them.

But, what again was your reason for not wanting to hold total bond? If you are thinking that is somehow a bad idea, especially a "bad idea right now" you are probably rejecting part of the whole concept in the three fund portfolio for long term investing.

Disclaimer: I hold intermediate Treasuries and Intermediate TIPS, but that is not because I think total bond is a bad idea. In any case I argue that my choice for the long run is effectively a three fund concept. I have held that position more or less since TIPS were first issued. That was 1997 and VIPSX first issued in 2000.
I think I'm in a classic not seeing the forest for the trees fugue. Looking at poor performance that bonds funds seem to be having right now and find myself asking myself, why put it into a bond fund if it's going to lose money. I think I just need to tell myself to STFU up, put the allocation I want in a bond fund and stop looking at it.
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Re: Is VTIP the best bond option right now?

Post by MishkaWorries »

CIPHERSTONE wrote: Thu Sep 16, 2021 8:55 am
z3r0c00l wrote: Thu Sep 16, 2021 8:45 am I don't think -2.24% SEC yield before inflation adjustment makes this a good option. Really this is a very specific ETF for very specific needs and I would posit that many (most?) individual investors who are not wealthy should look elsewhere for better options. My perennial recommendation if you are worried about inflation would be I bonds. If you are agnostic to future inflation, not knowing which way it will swing, I think a total bond fund might be the better choice if you want a bond fund in the first place. The longer duration and mix of bond types means it is more likely to offer higher return over long spans of time. Right now I bonds are beating them both handily but total bond did better for many years prior.
But your limited to $10k per year for I bond per person correct? I'm retiring in 8-10 years. I'm not a savvy investor, but I'm trying to follow the boglehead 3 fund portfolio for this account, the choice for the "Bond" portion is something I don't feel like I can get any firm answer /direction on.
Since this money is not expected to be needed for 8-10 years, I would not recommend VTIP. That is a short duration. You want to match the funds duration to your time of using the money.

Total bond fund is fine. If your concerned about corporate bonds and/or inflation, then go with intermediate treasuries. For our bonds we use 70% intermediate treasuries (SCHR Schwab's intermediate treasury ETF) and 30% intermediate Tips (SCHP Schwab's intermediate Tip ETF).
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Watty
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Re: Is VTIP the best bond option right now?

Post by Watty »

Is VTIP the best bond option right now?
Not that I have any special knowledge but I am retired and I use it for the bond part of my three fund portfolio.

I think calling it the "least bad" bond option might be a better way to describe it though.

I started using it about a year and a half ago when the markets were slumping at the beginning of the pandemic and the spending was being ramped up. Prior to that I had been using a Vanguard target date fund but I really did not like the international bond fund that it used. It had a longish duration and was yielding next to nothing so you would not be paid enough(for me at least) for the inflation and interest rate risk you would be taking with it.

I do not plan on using VTIP forever and will likely move to a more conventional set of bonds when we get through all this quantitative easing that has interest rates artificially low.
CIPHERSTONE wrote: Thu Sep 16, 2021 8:37 am I was wondering what the downside to VTIP is?
One thing to understand is that TIPS do not really protect you against expected inflation since that is already priced into what you pay for the TIPS. The big thing with them is that they protect you from UNEXPECTED inflation.

For example the difference in yield between a normal 10 year treasury and a 10 year TIPS is what the market expects inflation to be over the next 10 years. This is called the Breakeven Inflation Rate and that is about 2.35% right now. TIPS will only do well if inflation is higher than that over the next ten years. This is tracked by people and it can be interesting to see how this changes over time.

https://fred.stlouisfed.org/series/T10YIE

Image

In that chart I moved to VTIP when the Breakeven Inflation Rate was aabout 1% so my market timing(guilty as charged :D ) work out well since there has been higher inflation than that since then.

That is not to say that I like VTIP for the long term but it is more of a defensive place to park my money for now.
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Re: Is VTIP the best bond option right now?

Post by z3r0c00l »

CIPHERSTONE wrote: Thu Sep 16, 2021 8:55 am
z3r0c00l wrote: Thu Sep 16, 2021 8:45 am I don't think -2.24% SEC yield before inflation adjustment makes this a good option. Really this is a very specific ETF for very specific needs and I would posit that many (most?) individual investors who are not wealthy should look elsewhere for better options. My perennial recommendation if you are worried about inflation would be I bonds. If you are agnostic to future inflation, not knowing which way it will swing, I think a total bond fund might be the better choice if you want a bond fund in the first place. The longer duration and mix of bond types means it is more likely to offer higher return over long spans of time. Right now I bonds are beating them both handily but total bond did better for many years prior.
But your limited to $10k per year for I bond per person correct? I'm retiring in 8-10 years. I'm not a savvy investor, but I'm trying to follow the boglehead 3 fund portfolio for this account, the choice for the "Bond" portion is something I don't feel like I can get any firm answer /direction on.
$10,000 per year online plus $5,000 for a tax refund, couples can double that. If I had $10,000 in Ibonds for each year I've seen people on this forum use this number as an excuse to not have I bonds, I would have $100,000 in I bonds right now... which I do. And they are paying me over 4% each with zero risk/volatility, tax reduced/deferred.

I believe I bonds could still help someone going into retirement if they have about 10 years to build a decent amount. But you would do well with a bond fund like Total Bond also. Short term spending could be in something less volatile, like an online bank account.
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Re: Is VTIP the best bond option right now?

Post by retired@50 »

CIPHERSTONE wrote: Thu Sep 16, 2021 9:14 am
dbr wrote: Thu Sep 16, 2021 9:08 am
CIPHERSTONE wrote: Thu Sep 16, 2021 8:55 am But your limited to $10k per year for I bond per person correct? I'm retiring in 8-10 years. I'm not a savvy investor, but I'm trying to follow the boglehead 3 fund portfolio for this account, the choice for the "Bond" portion is something I don't feel like I can get any firm answer /direction on.
Correct. There is no firm direction on it. The reason the standard idea for the three fund portfolio just says buy US total bond fund is that this shortcuts any debate about what to do and has little basis for ever being actually wrong.

There are more choices in bonds than there are reasons to choose among them.

But, what again was your reason for not wanting to hold total bond? If you are thinking that is somehow a bad idea, especially a "bad idea right now" you are probably rejecting part of the whole concept in the three fund portfolio for long term investing.

Disclaimer: I hold intermediate Treasuries and Intermediate TIPS, but that is not because I think total bond is a bad idea. In any case I argue that my choice for the long run is effectively a three fund concept. I have held that position more or less since TIPS were first issued. That was 1997 and VIPSX first issued in 2000.
I think I'm in a classic not seeing the forest for the trees fugue. Looking at poor performance that bonds funds seem to be having right now and find myself asking myself, why put it into a bond fund if it's going to lose money. I think I just need to tell myself to STFU up, put the allocation I want in a bond fund and stop looking at it.
dbr raises some good points above, but for a visual representation of how little the bond choice matters, see this post (linked below) by forum contributor "livesoft". The graph is quite surprising.

See link: viewtopic.php?p=6222381#p6222381

Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
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