Is a TIPS ETF the Right Investment for You?

An ETF TIPS investment, which is based on the Treasury Inflation Protection Securities (TIPS), is right for the investor that is looking to protect their principal investment amount and keep pace with the rate of inflation. A TIPS ETF seeks to mirror the performance of an index by tracking its performance. TIPS are an appropriate investment for many investors who are looking to protect their principal investment amount and have a short investment period.

About Exchange Traded Funds

The purpose of an exchange traded (ETFs) fund is to provide investors with a low cost way to mimic the returns of an underlying index of securities without having to purchase each of the index’s securities. This low cost approach to diversification gives smaller investors the same level of access to the market as large institutional investors.

ETFs are passively managed funds that have a lower cost than a comparable mutual fund, which is actively managed. Both ETFs and mutual funds are created and governed under the same securities laws and require the investor to receive certain disclosures and information, which is found in the fund’s prospectus.

Is a TIPS ETF Right for You?

Determining whether an investment in an exchange traded fund based on an index of Treasury Inflation Protection Securities is right for you is based on your investment objectives and goals. TIPS are found mostly with investors who are risk adverse or more conservative in their investment approach and are looking to maintain their principal amount while keeping pace with inflation.

The way a TIP works is it is sold a discount to its par value (typically $1,000) and resets the interest rate to include an adjustment for inflation. There are more technical factors to how TIPS work than this (which are sold directly by the Treasury Department to investors) but the point is the security is an inflation protected investment. An investor that is searching for returns that are closer to what the Dow Jones or S&P 500 stock indices are returning would not be a suitable TIPS investor.

Determining When to use TIPS ETFs

Including some TIPS ETFs in your investment portfolio may make sense to provide you with some downside risk protection. This is because a portfolio of ETFs that are based solely on equities securities such as stocks are subject to the fluctuations of the stock market. This means that the as the market goes up the returns of the equity based ETF goes up, and vice versa. Adding fixed income ETFs (bonds), commodities and TIPS can balance out the variability of the stock market returns and provide more predictable returns.

The percentage of TIPS ETFs that should be included in an investment portfolio depends more on the age, goals and objectives of the investor and will change over time as the needs of the investor changes. It is a good idea to speak with a financial advisor to determine the right investment tools for your needs.

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