Eric Dutram: 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 (NASDAQ: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 seePIMCO 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.
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