Vanguard takes on Pimco and iShares with its first TIPS ETF.
Vanguard, the third-largest U.S. ETF provider by assets, today is launching a short-term inflation-protected securities index fund that includes an ETF share class that would compete with similar products from providers such as Pimco and iShares.
The Vanguard Short-Term Inflation-Protected Securities Index Fund (NasdaqGM: VTIP) will 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.
That index is the same benchmark San Francisco-based iShares uses for its $365 million iShares Barclays 0-5 Year TIPS Bond Fund (NYSEArca: STIP), which costs 0.20 percent. Vanguard’s VTIP ETF is set to have an annual expense ratio of 0.10 percent.
Vanguard is known for its low-cost index offerings, which it made clear with its recent decision to ditch MSCI indexes for FTSE and CRSP indexes in 22 of its funds as a way of reducing overall costs to investors. 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.
Indeed, VTIP fits that bill by also undercutting the price tag of 0.20 percent for the $994 million Pimco 1-5 Year U.S. TIPS Index Fund (NYSEArca: STPZ).
But Vanguard’s VTIP won’t be the cheapest in the space—that distinction still belongs to the Schwab U.S. TIPS ETF (NYSEArca: SCHP), which costs 0.07 percent.
Interest in inflation-protected bonds has been on the rise as investors become increasingly concerned about the prospects for inflation given the monetary stimulus central banks such as the Federal Reserve have injected into the global economy since the market crash of 2008.
Many see these “easy-money” policies as a prelude to a possibly powerful period of heighted inflationary pressures.
"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 issued when it first filed regulatory paperwork for VTIP in July of this year.
“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,” Sauter said at the time.
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.
Under Vanguard’s unique structure, its ETFs are a share class of mutual funds. 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 had total ETF assets of $231 billion as of Friday, Oct. 12, according to data compiled by IndexUniverse. It trails iShares, which has almost $525 billion, and State Street Global Advisors, which has nearly $324 billion.