TIPS ETFs Field Guide 2023: Are They Better Than Individual TIPS?

Larry, Managing Editor

TIPS ETFs Field Guide Are They Better Than Individual TIPS

TIPS, short for Treasury Inflation-Protected Securities, are a type of U.S. government bond designed to protect investors against inflation. However, when it comes to investing in TIPS, investors have the option to choose between individual TIPS or TIPS ETFs (Exchange-Traded Funds). TIPS ETFs, managed by professional fund managers, aim to make owning and managing TIPS easier for investors.  

Why you should care:

  • TIPS ETFs are funds that hold a diversified portfolio of TIPS bonds.
  • TIPS ETFs, like individual TIPS bonds, aim to protect you from inflation. They have additional benefits that individual TIPS do not have.

What you should know:

  • TIPS ETFs are traded on the stock exchange, which makes them a more accessible investment option compared to TIPS.
  • TIPS ETFs have some benefits that regular TIPS bonds do not, including diversification, monthly interest payments, and no phantom income.
  • Buying a TIPS ETFs means you’ll pay management fees. There are no fees associated with individual TIPS bonds.

What Are TIPS?

TIPS, or Treasury Inflation-Protected Securities, are a type of U.S. Treasury security designed to protect investors from inflation.

Unlike other fixed-income securities, the principal value of TIPS adjusts with inflation and deflation, as measured by the Consumer Price Index for All Urban Consumers (CPI-U). When inflation occurs, the principal value of TIPS increases, and interest payments, which are fixed rates applied to the adjusted principal, rise as well. Conversely, if deflation occurs, the principal value and interest payments decrease.

What Are TIPS ETFs?

TIPS ETFs are a type of ETF that holds a diversified portfolio of TIPS bonds. These ETFs trade on the stock exchange, making them a convenient and easily accessible investment option. 

TIPS ETFs have a few advantages over their individual TIPS counterparts

  • Diversification: One advantage of investing in TIPS ETFs is the potential for greater diversification. TIPS ETFs hold a basket of TIPS bonds, which can help spread out the risk compared to investing in individual TIPS.
  • Liquidity: Additionally, TIPS ETFs offer the potential for higher liquidity, as they can be bought and sold throughout the trading day on the stock exchange.
  • Total Return: TIPS ETFs aim to provide investors with both income from the TIPS bonds and potential capital appreciation. On the other hand, individual TIPS provide investors with interest payments and the adjustment of the principal value based on inflation.
  • Tax Advantages: TIPS ETFs avoid phantom income, which is one of the hairier things when dealing with individual TIPS. Phantom income is when investors pay taxes on the inflation-adjusted principal, even though this adjustment is not received until the TIPS matures.

It’s worth noting that TIPS ETFs, like other ETFs, come with expenses in the form of management fees. These fees are typically lower than those of mutual funds, making TIPS ETFs a cost-effective investment option.

When Do I Get Paid Interest From TIPS ETFs?

TIPS ETFs pay out interest monthly. TIPS ETFs aim to distribute the income they receive from the underlying TIPS bonds in their portfolios to the ETF shareholders. This monthly distribution includes the interest accrued on the individual TIPS bonds as well as any inflation adjustments.

With individual TIPS, the interest payments occur semi-annually, or every six months.

How Do TIPS and TIPS ETFs Compare?

TIPS (Treasury Inflation-Protected Securities) and TIPS ETFs (Exchange-Traded Funds that invest in TIPS) are both investment vehicles designed to provide protection against inflation, but they have several key differences.

Here’s a comparison overview of the two:

Key Characteristic TIPS ETFs Individual TIPS Bonds
Portfolio Diversification Yes No
Inflation-Linked Payments Distributed monthly Distributed at maturity
Payment Frequency Monthly Semi-annually
Ability to Reinvest Income Yes No
Trading Mechanism Exchange-traded Over-the-counter (OTC)
Transaction Fees Expense ratios None (when bought via TreasuryDirect or most brokerages)
Phantom Income No Yes
  1. Portfolio Diversification: TIPS ETFs invest in a basket of TIPS bonds, offering diversification, whereas buying an individual TIPS bond does not provide this benefit.
  2. Inflation-Linked Payments: TIPS ETFs distribute inflation adjustments on a monthly basis, while individual TIPS adjust the principal value for inflation but pay out the inflation-adjusted amount at maturity.
  3. Payment Frequency: TIPS ETFs usually pay interest monthly, while individual TIPS bonds pay interest semi-annually.
  4. Ability to Reinvest Income: TIPS ETFs allow for easy reinvestment of income, whereas reinvesting income from individual TIPS bonds can be more cumbersome.
  5. Trading Mechanism: TIPS ETFs are traded on exchanges, providing liquidity and the ability to trade intraday. Individual TIPS bonds are traded over-the-counter (OTC), generally with less liquidity.
  6. Transaction Costs: TIPS ETFs have expense ratios, which are ongoing costs. Individual TIPS bonds, when bought directly from the U.S. Treasury and most online brokerages, have no transaction costs.
  7. Phantom Income: Individual TIPS bonds can generate phantom income, which is taxable. TIPS ETFs generally do not distribute phantom income.

What is The Role of TIPS in a Portfolio?

TIPS ETFs serve a unique role in an investment portfolio. Similar to individual TIPS bonds, they offer a hedge against inflation, but do so by holding a diversified basket of TIPS. This diversification can enhance portfolio stability and reduce risk associated with holding individual bonds.

Additionally, TIPS ETFs generally provide more liquidity than individual TIPS bonds, as they are traded on stock exchanges. This allows for intraday trading, giving investors the flexibility to buy and sell shares at any time during market hours.

One of the distinct advantages of TIPS ETFs is the frequency of income payments. Unlike individual TIPS, which pay interest semi-annually and adjust for inflation at maturity, TIPS ETFs typically distribute income on a monthly basis, including any inflation adjustments. For investors seeking a more regular income stream, this can be beneficial. The ability to reinvest this income is also generally easier with TIPS ETFs, offering the potential for compound growth over time.

However, it’s important to note that TIPS ETFs come with some costs. They usually have expense ratios, which are ongoing fees charged as a percentage of the investment, reducing the overall return. Unlike individual TIPS, which when bought directly from the U.S. Treasury have no transaction fees, these ongoing costs can add up over time.

TIPS ETFs can be a valuable component of an investment portfolio, particularly for those looking for inflation protection, diversification, and a more frequent income stream.

List of Top TIPS ETFs

There are multiple TIPS ETFs that an investor may consider. Below, we list some of the more popular TIPS ETFs. 

ETF Name Target Duration Expense Ratio Investment Strategy
iShares TIPS Bond ETF (TIP) Broad/Mixed 0.19% Tracks the Bloomberg Barclays U.S. TIPS Index for broad inflation protection
iShares 0-5 Year TIPS Bond ETF (STIP) 0-5 Years 0.03% Focuses on short-duration TIPS for quick inflation responsiveness
Vanguard Short-Term Inflation-Protected Securities ETF (VTIP) 0-5 Years 0.04% Targets short-duration TIPS with a focus on low costs
Invesco PureBeta 0-5 Yr US TIPS ETF (PBTP) 0-5 Years 0.07% Targets short-duration TIPS aiming for performance that closely tracks the index​​
Schwab U.S. TIPS ETF (SCHP) Broad/Mixed 0.03% Broad exposure to U.S. TIPS with an emphasis on low costs​​
FlexShares iBoxx 3-Year Target Duration TIPS Index Fund (TDTT) 3 Years 0.18% Targets a 3-year duration for moderate risk and return​​
PIMCO 15+ Year U.S. TIPS Index Exchange-Traded Fund (LTPZ) 15+ Years 0.20% Focuses on long-duration TIPS for long-term inflation protection​​

Data as of October 2023.

TIP offers broad exposure to TIPS. STIP, VTIP, and PBTP focus on short-duration TIPS with low costs. SCHP also provides broad exposure with an emphasis on low costs. TDTT targets a 3-year duration for a balanced approach. LTPZ caters to investors seeking long-term inflation protection with long-duration TIPS.


What is a TIPS ETF?

A TIPS ETF is an exchange-traded fund that invests in Treasury Inflation-Protected Securities (TIPS). TIPS are government-issued bonds that are designed to protect investors from inflation by adjusting their principal value based on changes in the Consumer Price Index (CPI).

What is the difference between an individual TIPS and a TIPS ETF?

An individual TIPS is a single bond that matures on a specific date, while a TIPS ETF is a fund that holds a diversified portfolio of TIPS bonds. By investing in a TIPS ETF, investors can gain exposure to a broad range of TIPS bonds without having to purchase each bond individually.

Is it better to buy individual TIPS or TIPS ETFs?

A: Whether it is better to buy individual TIPS or TIPS ETFs depends on an investor’s preferences and investment goals. Buying individual TIPS bonds gives investors more control over the maturity dates and coupon rates of their investments, while TIPS ETFs offer diversification and ease of trading.

How do TIPS ETFs protect against inflation?

TIPS ETFs protect against inflation by adjusting the principal value of their underlying TIPS bonds based on changes in the CPI. As the CPI rises, the principal value of TIPS bonds increases, providing investors with a higher return.

Are TIPS ETFs a good investment for fixed income?

TIPS ETFs can be a good investment for fixed income, especially for investors who want to protect their purchasing power from inflation. By investing in TIPS ETFs, investors can potentially earn a higher return than traditional fixed-income investments during periods of inflation.

What is the total return of a TIPS ETF?

The total return of a TIPS ETF includes both changes in the principal value of the underlying TIPS bonds and any dividend distributions. It is important to note that the past performance of a TIPS ETF does not guarantee future results.