An Investor's Guide to Inflation-Protected Securities

by Annette Thau

An Investor's Guide To Inflation Protected Securities Splash image

In 1997, the U.S. Treasury introduced a new type of bond, whose return includes a component that tracks inflation. The purpose was to provide protection against inflation, which has always been the number one enemy of fixed-income investments, and therefore to protect investors against erosion of purchasing power. This bond was named TIPS: Treasury Inflation-Protected Securities.

In 1998, this concept was extended to the savings bonds program, through the creation of I Savings Bonds.

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In due time, mutual funds offered inflation-protected securities; and most recently, Barclays created an exchange-traded fund (ETF), which also invests in TIPS. (Note that the two terms: “inflation indexed” and “inflation protected” are used interchangeably to designate this type of instrument.) Inflation-protected securities were described at length in an article that appeared in the February 2004 issue of the AAII Journal (see “TIPS for Inflation-Proofing Your Portfolio: A Guide to Inflation-Indexed Securities” by Annette Thau; available at AAII.com). This article is an update. It will focus on the significant differences between these securities, and their performance over the past three years. In turn, this information should enable you to choose those that would be most appropriate for you if you want to add some inflation protection to your fixed-income investments.

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