Vanguard has long been a leader in the market of ultra-cheap
ETFs, and is in many areas, the purveyor of the least expensive
fund in any given category. This has proven to be a winning
strategy for the company as investors have flocked in droves to
these low cost products, giving Vanguard over a quarter trillion
dollars in total AUM in the process.
Yet, while the company has come to dominate a variety of
equity segments, it hasn't exactly reigned supreme over the bond
market as well. In fact, the firm has just a handful of products
each targeting a different subset of the U.S. government bond
market (read
Seven Biggest Bond ETFs by AUM
).
While they have all seen a decent level of interest, Vanguard
still has a long way to go in terms of matching its success in
the equity market. With that being said, it does look as though
the firm is continuing to expand its product lineup in the asset
class, especially with the launch of its first fund that focuses
in on the TIPS market, the
Short-Term Inflation-Protected Securities ETF (
VTIP
)
.
TIPS and VTIP in Focus
Treasury Inflation Protected Securities, or TIPS for short,
have been in focus for quite some time among investors looking
for bond holdings that offer some defense against rising prices.
After all, in these kinds of environments, bond values are
generally eroding as inflation eats away at their appeal, leaving
many investors to look for alternatives.
Potentially, TIPS can act as a great substitute in these kinds
of markets as they provide a solid level of protection no matter
the rate of inflation in the economy. This is done by
adjusting the principal of TIPS
, increasing with inflation and decreasing with deflation, as
measured by the CPI (read
Fight Inflation with These TIPS ETFs
).
Additionally, these securities pay interest two times a year
at a fixed rate. However, the rate is applied to the adjusted
principal so the payments will rise with inflation (or fall with
deflation), giving investors some measure of defense against
rising prices.
Vanguard looks to implement this technique with a focus on the
short end of the curve with its VTIP, holding securities that
have a maturity of less than five years. While this is similar to
other products on the market, investors should note that it is
the cheapest choice in the space by far, charging just 10 basis
points a year in fees (also read
Long Term Treasury ETFs: Ultimate QE3 Play?
).
Short-Term TIPS Market
While VTIP might crush its competitors from a fee perspective,
it still has an impressive number of foes to deal with in the
American TIPS ETF market. Currently, there are nine other U.S.
centric TIPS ETFs, including the ultra-popular
TIP
and what looks to be a big competitor to VTIP,
PIMCO's
STPZ
.
PIMCO's product also focuses in on the short end of the curve,
holdings securities that have between one and five years to
maturity. The fund currently has over $1 billion in AUM, although
it does charge double VTIP at 20 basis points a year (also see
PIMCO Launches Global TIPS ETF
).
Given this large competitor, and the presence of a number of
small funds as well, VTIP could have a difficult time building an
asset base, especially given how low TIPS yields are at the
current time. With that being said, if inflation starts to become
a big problem, this new product could see some decent inflows
from cost-conscious investors, suggesting that the fund could
eventually be a major player in the TIPS ETF market at some point
down the road.
Follow
@Eric
Dutram
on Twitter
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PIMCO-1-5 YR TP (STPZ): ETF Research Reports
ISHARS-BR TRES (TIP): ETF Research Reports
(VTIP): ETF Research Reports
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