Understanding the Fidelity® Inflation-Protected Bond Index Fund

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enjoyinglife
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Understanding the Fidelity® Inflation-Protected Bond Index Fund

Post by enjoyinglife »

Please help me understand what's happening with the Fidelity® Inflation-Protected Bond Index Fund (FIPDX) as I come from the school of it's “too good to be true – it's probably not”

According to fidelity's site the 30 day yield is currently 5.46%, with 99.7% of it's holdings in US Treasuries. Duration is 5.4 years.

I currently have the large majority of my bond holdings in the Fidelity® U.S. Bond Index Fund (FXNAX). It's 30 day yield is 1.28%, 39% in US Treasuries and a duration of 6.2 years.

On the surface if I switch to the FIPDX fund I get a much better yield, safer holdings and a better duration with rising interest rates forecast.

What I am missing???
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leeks
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Re: Understanding the Fidelity® Inflation-Protected Bond Index Fund

Post by leeks »

Equivalent to Vanguard Inflation-Protected Securities Fund Investor Shares (VIPSX)?
ruud
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Re: Understanding the Fidelity® Inflation-Protected Bond Index Fund

Post by ruud »

That yield is very temporary due to the spike in year-over-year inflation (because prices fell last year due to the pandemic).
The performance of the Fidelity fund is nearly identical to Vanguard's VAIPX and Schwab's SCHP: PV.
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MishkaWorries
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Re: Understanding the Fidelity® Inflation-Protected Bond Index Fund

Post by MishkaWorries »

enjoyinglife wrote: Wed Jun 16, 2021 9:06 am Please help me understand what's happening with the Fidelity® Inflation-Protected Bond Index Fund (FIPDX) as I come from the school of it's “too good to be true – it's probably not”

According to fidelity's site the 30 day yield is currently 5.46%, with 99.7% of it's holdings in US Treasuries. Duration is 5.4 years.
What I am missing???
Sounds about right to me. SCHP Schwab's intermediate Tips fund of 7.4 years duration is paying a 30 day SEC yield of 7.83%.

But no one knows how long the inflation bump we're getting now will last.
We plan. G-d laughs.
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jeffyscott
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Re: Understanding the Fidelity® Inflation-Protected Bond Index Fund

Post by jeffyscott »

ruud wrote: Wed Jun 16, 2021 9:58 am That yield is very temporary due to the spike in year-over-year inflation (because prices fell last year due to the pandemic).
The performance of the Fidelity fund is nearly identical to Vanguard's VAIPX and Schwab's SCHP: PV.
It is actually even worse than that, it's not based on year-over-year inflation, it's based on just the last month's reported figure, since it's a 30 day yield. It's a completely worthless number, unless you are expecting 0.8% per monthly inflation to continue indefinitely (that would be 10% annualized).



Given the way many TIPS funds interpret the SEC yield formula, the change in inflation over the latest reported month gets added to interest income to produce an annualized figure.
...
The bottom line: While the SEC yield is a decent guide in other bond funds, it can steer you wrong in an inflation-protected bond fund. Before buying a TIPS fund, ask instead what its real yield is.

SEC yields "are like the square root of negative-1 in algebra," says bond expert Frank Fabozzi, a finance professor at Yale University. "They give you an imaginary number."

https://www.wsj.com/articles/SB10001424 ... 3576172904
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SimpleGift
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Re: Understanding the Fidelity® Inflation-Protected Bond Index Fund

Post by SimpleGift »

enjoyinglife wrote: Wed Jun 16, 2021 9:06 amWhat I am missing???
The SEC 30-day yield published for most TIPS funds is almost always a bogus number, as jeffyscott points out above. Compare for yourself the differing methodologies for reporting the yield on the Fidelity vs. the Vanguard TIPS funds below:

Fidelity Inflation-Protected Bond Index Fund (FIPDX)
Fidelity wrote:A standard yield calculation developed by the Securities and Exchange Commission for bond funds. The yield is calculated by dividing the net investment income per share earned during the 30-day period by the maximum offering price per share on the last day of the period. The yield figure reflects the dividends and interest earned during the 30-day period, after the deduction of the fund's expenses. It is sometimes referred to as "SEC 30-Day Yield" or "standardized yield".
Vanguard Inflation-Protected Securities Fund Investor Shares (VIPSX)
Vanguard wrote:The yield quoted is the real yield, or the yield before adjusting for inflation. The actual yield of Vanguard Inflation-Protected Securities Fund will be a combination of the real yield and an inflation adjustment. A complete estimate of the fund's yield requires that an estimate of future inflation be added to the real yield. Because inflation fluctuates, it cannot be projected into the future precisely enough to be included in the yield quote.
Vanguard bypasses the bogus SEC 30-day methodology, and simply reports the real yield for their TIPS funds. To this real yield, one can add their own estimate of the future inflation rate to get a rough estimate of the fund's prospective yield.
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grabiner
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Re: Understanding the Fidelity® Inflation-Protected Bond Index Fund

Post by grabiner »

SimpleGift wrote: Wed Jun 16, 2021 6:04 pm Vanguard Inflation-Protected Securities Fund Investor Shares (VIPSX)
Vanguard wrote:The yield quoted is the real yield, or the yield before adjusting for inflation. The actual yield of Vanguard Inflation-Protected Securities Fund will be a combination of the real yield and an inflation adjustment. A complete estimate of the fund's yield requires that an estimate of future inflation be added to the real yield. Because inflation fluctuates, it cannot be projected into the future precisely enough to be included in the yield quote.
Vanguard bypasses the bogus SEC 30-day methodology, and simply reports the real yield for their TIPS funds. To this real yield, one can add their own estimate of the future inflation rate to get a rough estimate of the fund's prospective yield.
And the real yield is the number you care about. If you are buying TIPS, it is presumably because you want inflation protection. If the TIPS fund has a real yield of 0.00%, and TIPS yields don't change, the fund will match inflation, regardless of what inflation is. If the real yield is -1.00%, and TIPS yields don't change, the fund will underperform inflation by 1%.
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