As we all are watching interest rates go lower and lower we are being forced to take more risk in our investments to achieve the returns we desire. With Bernanke’s operation twist we have seen treasury rates fall to record lows. Investing in foreign banks that pay higher interest rates is a hassle and can tie up your funds for an extended period of time. So if I was looking for something to park some ”moderately safe” funds for a short or intermediate period of time one might look at the ETF (TIP). Yes that’s right, the ishares barclays TIPS bond fund. I have heard almost every single analyst trash this etf with the same argument. It is attached to an index that is heavily manipulated by the US Government. I agree the CPI is in fact manipulated, however in an environment where money printing is the norm, those inflation numbers start to add up. According to the inflation calculator. (http://www.usinflationcalculator.com/inflation/current-inflation-rates/) we have seen a 3.4% rate of inflation in 2011, now keep in mind they have not calculated December yet. This investment tracks the CPI index, and in months of positive inflation the TIP bond etf will pay a dividend. In months where inflation is negative it will not pay a dividend but will carry the balance forward to the next month. During down turns in the market the price of the TIPS fund tends to rise as investors look to find safety in the markets. During times of economic growth (typically) or during times of quantitative easing TIP will pay out a dividend based on the CPI which is calculated month to month.
I copied the rates of return off the ishares website to show you the consistency of the investment-
Avg. Annualized Total Returns (NAV)qtr. as of 12/31/2011View all performance
1 Year 3 Years 5 Years 10 Years Since Inception
TIP 13.40% 10.25% 7.80% – 6.28%
Index 13.56% 10.38%7.95% 7.57% 6.44%
As you can see the performance of (TIP) has had consistent returns over the years. I like the ETF because of the liquidity, if my stock holdings take a dive and I want to buy more shares at a bottom feeding price then I can sell my (TIP) shares and buy my stock shares right away. I am well aware of the problems the US Treasury is going to face in light of downgrades and credit issues. However lets face it, they are going to turn on the printing presses to no end to save the value and create liquidity in the treasury markets. I would hope we would have enough time to exit into something safer when the warning signs come. Until then, I believe this is a great tool for your toolbox of investments and a good place to hold some safe money while waiting for those stocks to get cheaper.