Treasury inflation-protected securities (TIPS) are a very beneficial addition to many investment portfolios because of their diversification benefits and protection in environments when inflation is rising. TIPS are adjusted to the most commonly used inflation measure, the Consumer Price Index[1] (CPI). When the CPI rises, the principal amount of TIPS is adjusted upward, and when the CPI falls, the principal is adjusted downward. The coupon rate stays constant, thus generating varying amounts of interest based off the inflation-adjusted principal. The end result is that investors are protected against inflation.
This asset class generally does not provide high yields because of its low-risk nature. However, some TIPS mutual funds do have attractive yields. From a sample of over 50 TIPS-based mutual funds, the following three funds are the most attractive. Note that funds including a load[2] were removed from the list since a load is essentially a one-time "negative yield" that brings the first year's effective yield to below zero in most cases. What follows are the top three no-load TIPS-based mutual funds with the highest yields as of March 2016.
Harbor Real Return Institutional Fund
The Harbor Real Return Institutional Fund ("HARRX") primarily invests in inflation-indexed bonds of varying maturities issued by the U.S. government, non-U.S. governments, agencies and corporations. HARRX may invest up to 30% of its assets in securities denominated in foreign currencies and may invest up to 10% in issuers in emerging markets. While the fund invests primarily in investment-grade securities, it may allocate up to 10% into high-yield bonds.
The fund's duration normally varies within three years of the Barclays U.S. TIPS Index. HARRX has 132 different holdings; however, nine of the top 10 holdings are U.S. TIPS that comprise 93.5% of net assets. The fund's weighted average duration is 7.25 years, its trailing 12-month yield is 2.39% and its yield to maturity is 3.16%. The minimum investment amount is $1,000.
VY BlackRock Inflation Protected Bond Portfolio
The VY BlackRock Inflation Protected Bond Portfolio ("IBRIX") invests at least 80% of its net assets in inflation-indexed bonds of varying maturities issued by the U.S. and non-U.S. governments, their agencies and U.S. and non-U.S. corporations. The fund may invest up to 20% of the portfolio into any of the following assets: high-yield bonds, emerging market debt and non-dollar denominated securities of non-U.S. issuers. At the portfolio manager's discretion, IBRIX may invest in U.S. Treasury securities, mortgage-backed securities, investment-grade corporate bonds, asset-backed securities or collateralized mortgage obligations[3] (CMOS).
IBRIX maintains an average portfolio duration within plus or minus 20% of the duration of the Barclays Capital Global Real U.S. TIPS Index. It has 163 holdings, and of those, the top 10 comprise 56.04% of the portfolio and are all U.S. TIPS. IBRIX has a trailing 12-month yield of 1.03% and does not have a minimum investment.
Vanguard Inflation-Protected Securities Fund
The Vanguard Inflation-Protected Securities Fund ("VIPSX") is one of the largest TIPS funds available with $23.2 billion in assets under management[4] (AUM). The fund invests in bonds backed by the full faith and credit of the federal government and whose principal is adjusted quarterly based on inflation. VIPSX has 45 different holdings, and nearly 100% of them are U.S. TIPS. It has an average effective duration of 8.3 years, a yield to maturity of 1.80% and a trailing 12-month yield of 0.74%. The minimum investment for this fund is $3,000.
Honorable Mention
An honorable mention on this list is the PIMCO Real Return Asset Institutional Fund ("PRAIX"). It is a high-quality mutual fund that invests in inflation-linked bonds. Its trailing 12-month yield is 1.98%. The caveat is the minimum investment for this fund is $1 million.
References
- ^ Consumer Price Index (www.investopedia.com)
- ^ load (www.investopedia.com)
- ^ collateralized mortgage obligations (www.investopedia.com)
- ^ assets under management (www.investopedia.com)
