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Why This Vanguard Inflation Fighter Gets a High Rating

Vanguard Inflation-Protected Securities’ simple but cheap and effective approach makes it a winner.

Silver Medalist Illustration

Key Morningstar Metrics for Vanguard Inflation-Protected Securities

  • Morningstar Medalist Rating: Silver (Bronze for the Investor share class)
  • Process Pillar: Above Average
  • People Pillar: Average
  • Parent Pillar: High

Vanguard Inflation-Protected Securities’ VAIPX straightforward but effective style and low expenses make it appealing.

The fund recently saw a manager change but is still capably managed. When longtime lead manager Gemma Wright-Casparius retired at the end of 2021, Vanguard tapped John Madziyire to succeed her. Madziyire, who has been with Vanguard since 2017 and used to be the head of the firm’s London-based European interest-rate team, has more than two decades of industry experience. That included managing this fund’s global interest-rate stance for the last decade. And Vanguard gives him ample support, including dedicated traders and quantitative analysts.

The fund is a pure play on U.S. Treasury Inflation-Protected Securities. It typically has more than 90% of its assets in TIPS, while rivals tend to keep more in other security types. This no-nonsense fund usually doesn’t stray too far from the Bloomberg US TIPS Index risk characteristics. It limits its active bets to modest duration and yield-curve differences and to trading strategies that exploit temporary market imbalances. The manager will keep small cash and nominal Treasury bond stakes because TIPS can be thinly traded at times.

While Madziyire and team can invest up to 20% of the fund’s assets in bonds other than TIPS, tight internal guardrails curtail this fund’s flexibility more than its competitors. The fund’s 6.48-year duration, a measure of interest-rate risk, as of September 2023 was the same as the index’s, but slight yield curve differences, such as underweighting TIPS in the five- to 10-year range and overweighting those in the 20- to 30-year range, reflect the team’s expectation for a flatter yield curve.

Vanguard Inflation-Protected Securities: Performance Highlights

Given its buttoned-up process, the fund’s long-term performance has been near the median of inflation-protected bond peers. Its Admiral shares’ trailing 10-year 1.6% annualized return through October 2023 beat its distinct inflation-protected bond Morningstar Category median peer’s 1.5% gain and was about even with the Bloomberg US TIPS Index’s gain. While performance has been consistent over calendar years, it hasn’t come out ahead of the index since 2014 despite its razor-thin expense ratio.

When adjusting for risk, the strategy’s Sharpe ratio (a measure of excess return relative to its standard deviation) was also near the median.

TIPS funds are still susceptible to rising long-term yields because of higher inflation; the fund’s stringent duration profile versus its index can make it more vulnerable to rising real yields relative to more flexible peers. In response to the Russia-Ukraine conflict at the beginning of 2022, higher inflation caused higher long-term real yields. The fund’s 11.9% 2022 calendar-year loss was slightly more severe than its median rival’s 11.6% drop. The strategy’s slightly longer duration than peers, which includes a smaller subset of shorter-duration strategies, caused it to lose 1.4%, slightly more than its typical rival’s 1.2% drop for the year to date through October 2023.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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