TIPS, The Perfect Partner For The Tariff Wars

Below is a piece that I wrote on Saturday for Seeking Alpha, where I have been publishing since 2007. I love Seeking Alpha and I understand why they rejected this, but I like the article and am sharing it. I just added LTPZ back to my IRA today, and this is the only change that I made to the article.

The financial world is facing something very big and very different: tariffs. Many are concerned about inflation, and gold, as measured by SPDR Gold Shares (GLD), a huge fund, has soared to an all-time high. Since the elections, GLD has gained 17.6%:

At $297.98, GLD has gained 23.1% year-to-date. Gold miners, as measured by Van Eck Gold Miners ETF (GDX), have done even better, rising 38.8% year-to-date so far. This is with stocks, as measured by SPDR S&P 500 ETF (SPY), down 3.0%. Smaller stocks, as measured by iShares Russell 2000 ETF (IWM), have declined even more, falling 9.1%.

Gold Has Challenges

I have no position currently in gold or gold miners, but I have been short. I covered, for now, but I am encouraged by the recent action, which looks like a top. Here is GLD and GDX since 04/02 (Liberation Day):

Both GLD and GDX are up since Liberation Day news hit, but they have declined from their peaks in April. GLD has dropped 5.6%, and GDX has dropped 9.3%. This has happened as the markets overall have rallied back. This is easier to say by looking at the action since 4/21:

There are many reasons people like to buy gold, but near the top of the list is likely the view that it protects against inflation. Another reason may be that gold is seen as higher quality than currencies.

In my view, a big reason for gold to go up has been that is going up! Chasing momentum has become very popular. But, perhaps the momentum has ended over the past two weeks.

Gold pays no dividends and has no direct tie to inflation, which was pretty much dead until the pandemic hit. Gold prices did lift when the pandemic hit, but they have extended by so much since then. Since the end of 2019, GLD has returned 108.5%, which is ahead of SPY at +90.6%. GDX has gained 72.0%, while IWM is up only 29.4%. Over the past three years, GLD has ruled as well:

Nobody knows which way stocks are headed, but many people think they do. I know that I don't know, but I expect that stocks will fall. If that is the case, there could be pressure on GLD and GDX. Many will want to buy the dip on stocks by selling what has done well, which is perhaps what just happened over the past two weeks. Maybe stocks will keep rallying! If that's the case, then inflation likely will be less of a potential risk than is currently assumed, and this will hurt GLD and the miners in my view.

While the U.S and other countries use to use a gold standard that tied their currencies to gold, none do today. With that said, many countries do have gold reserves. At the end of 2024, 7 countries each held more than 1000 metric tons (2204 pounds per metric ton) according to Trading Economics. The U.S. had 8133 metric tons, which is slightly less than the next three (Germany, Italy and France). According to the Word Gold Council, the total amount of gold in the world is currently 216K metric tons, with total reserves representing 25%. No major country is currently moving towards implementing a gold standard.

So, gold is up a lot, rising by 571.4% since GLD was launched in late 2004. This is almost as much as stocks have returned with dividends (601.3%) and more than the price return of 377.3%. Inflation fears are driving the price, but I am not sure this makes sense.

Treasury Inflation-Protected Securities Could Protect Investors

I first wrote about Treasury Inflation-Protected Securities in February, suggesting that investors buy the PIMCO 15+ Year U.S. TIPS ETF (LTPZ) to protect against inflation. That article explained the history of TIPS (introduced in 1997) and why they should do better. It also discussed the risks, which I again discuss below. I followed up with an article about the very large ETF,  iShares TIPS Bond ETF (TIP) in early April just after Liberation Day. TIP had dropped in price as stocks were hammered, and I suggested that it should do better. The price has rallied since I wrote that piece, with the stock closing on 4/17 at $107.97. It has also paid a monthly dividend since then too.

In this follow-up piece, I want to reiterate my optimism for TIPS. First, here are the returns of these two ETFS and another one, the Vanguard Short-Term Inflation-Protected Securities Index ETF (VTIP) along with a money-market fund since the elections:

TIP has done just barely better than the money-market fund, while LTPZ has significantly underperformed. VTIP, which I am initiating with coverage today at Buy, has outpaced cash. As I explain below, I like VTIP and own a mutual fund that is part of the larger group of assets that Vanguard manages to beat an index of short-dated TIPS.

Again, the securities in these ETFs are tied to inflation, with their principal adjusted on a monthly basis. TreasuryDirect, which oversees the new issuance of TIPS (5 year, 10 year and 30 year maturities) has a good piece that explains how TIPS work. Jason Zweig, a Wall Street Journal contributor that I really respect (writes The Intelligent Investor every weekend) wrote about TIPS right after the election. He said that those who are worried about inflation should buy TIPS.

Which TIPS Make Sense?

Investors who want to buy TIPS can buy them at auction or on the secondary market, or buy funds. I have discussed three funds, each of which is quite large with low fees.

I like TIPS, and I own a lot of a fund similar to VTIP in my philanthropic fund that is part of Vanguard Charitable. While the holding of Vanguard (VTSPX) is quite large at 23.6% of the fund, I have reduced it recently, selling some in late March and then again in late April. I have also reduced my other holdings for cash as well, and the cash is now at 40.8%. For those who fear inflation, cash is a good idea too! 

I continue with my Strong Buys on LTPZ and TIP, and I am initiating a Buy on VTIP. My wife owns LTPZ currently and I just bought some back today after trimming it at a higher price recently I have not shared price targets on any of these, as the returns will be highly dependent upon future CPI levels. In the TIP article, I suggested it could advance to $124-130 over the next year, and this remains my expectation. That would give a price return of 16.5% at the midpoint. I think LTPZ could do even better. From my perspective, it could move by 44% to $75. I base this on the gap in the chart from three years ago and some thought about what would happen if the trading yield were to drop to 0% for long-dated TIPS. With a duration of 19.2 according to PIMCO and a current yield for its holdings at about 2.5%, this would represent a price increase of 50%. TIPS, by the way, did trade below 0% yield in 2021. I don't have a big price jump expectation for VTIP, as its return will be highly dependent upon future inflation rates.

Extend Your TIPS Maturities

What is good about shorter TIPS and VTIP is that one is not taking any duration risk that is entailed by investing in longer-dated TIPS. I still like VTIP, but it has done better than cash over the past three months by perhaps too much, rising 2.4% with dividends. I stand by ready to buy more if it pulls back a bit. VTIP has a short duration and has less price risk than TIP or LTPZ. I think it makes more sense than shorter Treasuries. The expense ratio is just 0.03%, and Vanguard suggests that the weighted average maturity is 2.5 years. I am a big fan of Vanguard, and this is the largest of the short-focused TIPS ETFs.

I continue to like TIP, which owns the entire maturity range, but I like LTPZ, which holds only long-dated TIPS, the best. As I explained in the piece in February, the volatility in long-maturity Treasuries is weighing on it in my view. I think that total-return charts make more sense for TIPS than price-charts, but here is a price chart over the past 5 years for LTPZ and  iShares 20+ Year Treasury Bond ETF (TLT):

These are very highly correlated in my view. Looking at the total returns, the outperformance of LTPZ is even more clear (-23.8% vs. -40.2%). LTPZ was started in 2012, and its shares have increased from 4.92 million then to 13.22 million now, a gain of 169%. The gain since then in TLT has been 1970%! More recently, though, TLT has been seeing redemptions:

Shares outstanding in LTPZ have actually increased just a bit over the past six months. You know what else has seen its shares outstanding soar? GLD!

So, a soaring price of GLD and more shares outstanding. Hmm. The contrarian in me is getting excited. Here is the updated chart of GLD vs. LTPZ:

LTPZ was making money for those who were trying to protect against inflation in 2021, but it has been clobbered since then. Gold has soared!

While LTPZ is smaller than the other two ETFs I have rated, it does have a net asset value of $693 million, which is big enough in my view. Its total expenses of 0.2% aren't an issue in my view. Here is the price chart over the past 13 years for VTIP and LTPZ:

This chart runs back to the end of 2012, when VTIP started trading. LTPZ has increased in price  slightly since the end of 2009, when it launched, and it has plunged since it was run-up in 2021 after the pandemic. For those who think that TIPS will be in higher demand again, longer-duration makes sense. The short duration of VTIP is pretty clear here, as the price does not move that much.

VTIP is a very large ETF. I like it, but it makes more sense for those who are expecting inflation to buy LTPZ. Each of the ETFs will protect owners from inflation, but there is a good chance that capital gains will be quite large on LTPZ too.

I like ETFs in general, though I understand that many want to hold individual securities. Like LTPZ, I suggest longer-dated TIPS. The government last sold 30-year TIPS in February. The next auction of 30 year TIPS will be in August.

According to Bloomberg, the current yields on TIPS have increased over the past month:

Readers need to remember that these yields do not account for the inflation adjustments to the principal.  The total return will be higher if there is inflation. Adding 3% to these yields would make the returns higher than regular Treasuries.

Challenges and Risks for TIPS

I have mentioned several challenges and risks for TIPS, which have large size but are far outweighed by the size of regular Treasuries. All Treasury securities, including TIPS, face the potential risk of the U.S. defaulting on its debt, though I see little evidence of this so far. A bigger risk is that the supply of Treasuries could grow as the U.S. issues more to pay interest and fund continuing budget deficits. The trade war with China, which holds a lot of Treasury securities, could weigh on Treasuries too (less demand, potential resale supply).

Another risk for Treasuries and for TIPS, which are obligations of the U.S., is that the U.S. could be downgraded.

TIPS are tied to the CPI data managed by the U.S. It is possible that the government could manipulate this data, though I have seen no evidence that this has happened before.

A final risk is that TIPS are exposed to deflation. If we don't have inflation but rather deflation, the principal value of TIPS could decline.

Conclusion

I am not an economist, though that is what I majored in many years ago and have been paying a lot of attention since then. I am not predicting inflation, but it sure seems very possible. I believe that investors would be wise to try to protect themselves, and I think that TIPS make a lot of sense.

What I like about TIPS right now is that there is no investor sentiment pushing them like it has pushed gold. I am worried about the government debt, which I have been following since 1982, when I was in high school. I have never been worried about it before, but it is a huge problem after the tax cuts ahead of the pandemic and then the spending subsequent to the pandemic. I am not a fan of Treasuries at all, but TIPS seem pretty costless to Treasuries currently.

I also don't like stocks currently and do like cash. Cash will protect investors from inflation, but it won't make them any money beyond the interest. For those who want to make money from inflation, I highly recommend avoiding gold and buying TIPS. Specifically, I like LTPZ the most for reasons I have explained, but I like VTIP and TIP too.