Inflation-proof your portfolio |
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"We have coupon payments that have come into the fund; we also have a distribution that the fund has to pay on earned income; and the fund will rebalance, so if there are bonds that have fallen out of the index or new bonds that have been issued, the fund will be doing trades to rebalance.
"Those three factors could create positive or negative cash in the fund. It depends on the size of each of the different factors -- essentially how much coupon is coming in, how much income we're paying out, and what the net cash is from any bonds that are added or deleted from the fund," says Tucker.
If you buy a bond fund or an exchange-traded fund, you're buying because of the expectation that there will be inflation.
"My concern about an exchange-traded fund or an open-end fund when you're talking about TIPS is that, while they've been out for a while, we still don't know exactly how they're going to trade because a lot of it is the expectation -- the expectation for inflation," says Hopwood. "It's not like buying a Treasury -- if interest rates go up the value goes down and vice versa. You're buying something that is a hybrid between a zero coupon bond and a coupon-paying bond."
The Treasury bond fund provides diversification. You'll have a variety of bonds with differing yields and maturities, but you sacrifice the certainty of having your full principal returned.
If you buy an individual TIPS bond, you'll receive the full principal or more at maturity and you'll receive semiannual interest payments. Increases in principal are taxable in the year that they're earned, even though you don't receive them until maturity.
"TIPS would always have some sort of interest payment as long as the coupon set at auction was above zero," says Steve Meyerhardt, spokesman for the Bureau of Public Debt.
Buying TIPS on your own
You can buy individual TIPS bonds easily enough on your own. If you have a brokerage account, you should be able to buy bonds online at auction without paying a fee or sacrificing any yield. If you require a representative's assistance, you may be charged a commission. Check with your brokerage before buying.
You can also open an account with the U.S. Treasury's retail gateway, TreasuryDirect. Opening an account lets you to participate in TIPS auctions -- and to buy other Treasury securities in addition to TIPS. You must link your account to a checking or savings account, which TreasuryDirect will debit for your purchases and credit when your security matures or an interest payment is due. TreasuryDirect stores your securities in paperless electronic form.
TIPS are sold in maturities of five, 10, and 20 years. Five-year TIPS are auctioned in April and October. Ten-year TIPS auctions are held in January, April, July, and October. And 20-year TIPS are auctioned in January and July.
You have the option of making a competitive or non-competitive bid. The bidding process is simple and is explained on the Web site. Individual consumers are strongly advised to make noncompetitive bids. You'll get the high rate that results from the competitive bidding of professional money managers.
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