Vanguard To Challenge Pimco TIPS ETF

July 24, 2012

Vanguard plans a short-term TIPS fund that will cost half as much as the competition.

Vanguard, the third-largest U.S. ETF provider by assets, filed regulatory paperwork to market a short-term inflation-protected securities index fund that would include an ETF share class that would compete with similar products from Pimco and iShares.

Under Vanguard’s unique structure, its ETFs are a share class of mutual funds. The prospectus detailed plans for a Vanguard Short-Term Inflation-Protected Securities Index Fund that would track the Barclays U.S. Treasury Inflation-Protected Securities (TIPS) 0-5 Year Index, and invest in inflation-protected U.S. Treasury securities that have a remaining maturity of less than five years.

The fund would serve up four share classes, including an ETF share class that would cost 0.10 percent in fees, or half the price tag of competing funds.

The iShares Barclays 0-5 Year TIPS Bond Fund (NYSEArca: STIP), which is also based on the same Barclays index Vanguard will be using, costs 0.20 percent. The fund has gathered some $358 million in assets since it came to market in December 2010. The Pimco 1-5 Year U.S. TIPS Index Fund (NYSEArca: STPZ) also costs 0.20 percent a year and has just shy of $1 billion in assets. It launched in early 2002.

Interest in inflation-protected bonds has been on the upswing amid growing concern among investors that excessive monetary stimulus from central banks such as the Federal Reserve is creating inflationary pressure that will rear its head before long.

"The new Short-Term Inflation Protected Securities Index Fund will provide an additional choice for investors who are seeking protection from inflation,” Vanguard Chief Investment Officer Gus Sauter said in a press release Vanguard prepared to trumpet the regulatory filing.

“The fund's objective will be to generate returns more closely correlated with realized inflation and to offer investors the potential for less volatility of returns relative to a longer-duration TIPS fund,” he added.

More broadly, the fact that Vanguard plans to undercut both iShares and Pimco is par for the course for the firm, which is known for its low-cost funds. As a mutually structured company that is owned by holders of its funds, Vanguard runs its products at cost, giving it an advantage over most firms.

The Details

Vanguard’s index fund has an effective duration and an average maturity of roughly 2 1/2 years. It would join the company’s $43 billion actively managed Inflation-Protected Securities Fund, which has a duration of 8.5 years and an average maturity of 9.3 years, the company said.

Vanguard said in the filing it aims to have the registration statement become effective on Oct. 10, meaning a launch could come shortly after that.

Aside from the ETF share class, the planned index fund will also offer an Investor Shares class that will cost 0.20 percent, an Admiral Shares class that will cost 0.10 percent and an institutional share class costing 0.07 percent.

The classes are divided by amount of initial investment, with Investor Shares, Admiral Shares and Institutional Shares requiring minimum investments of $3,000, $10,000 and $5 million, respectively.

“To offset the transaction costs of purchasing TIPS, the fund will assess a 0.25 percent purchase fee on all shares, excluding ETF shares,” the company added in the release.

Vanguard manages some $700 billion in fixed-income-linked assets, including $235 billion in bond index fund assets and $37 billion in bond ETF assets.  The Valley Forge, Pa.-based company had ETF assets totaling more $208 billion, according to IndexUniverse’s latest “ETF League Table.”


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