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A Cheap Option for TIPS Investors

Schwab U.S. TIPS ETF is one of the cheapest options available for investors looking to take out some portfolio insurance.

A Cheap Option for TIPS Investors

Jun 16, 2016

Brian Moriarty:The Schwab U.S. TIPS ETF, ticker SCHP, is the cheapest option available for investors looking to invest in Treasury Inflation-Protected Securities. The fund has a 7 basis points expense ratio, which is significantly below the average of both ETFs and open-end funds that invest in TIPS.

TIPS ETFs offer investors a pure play on inflation protection. If inflation rises rapidly, TIPS will outperform other asset classes. But if inflation remains flat or falls, TIPS will underperform those asset classes. For this reason, TIPS should be viewed as insurance for the rest of the portfolio, and cost matters when buying insurance.

Investors should also be aware that TIPS are significantly more volatile than nominal Treasury bonds. For example, the standard deviation on SCHP was nearly twice that of the Barclays U.S. Aggregate Bond Index. TIPS are not for the faint of heart, but they offer investors important insurance for the rest of their portfolio. Since cost matters when buying insurance, and SCHP is one of the cheapest options available, it is one of our picks for TIPS exposure.

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