Are TIPS ETFs the Best Way to Fight Inflation?

Ivanna Hampton: Welcome to Investing Insights. I’m your host, Ivanna Hampton. Is persistent inflation making TIPS ETFs more attractive? Hundreds of millions of dollars flowed into this niche investment in September, according to Morningstar data. Yet, there’s a debate over whether they’re an ideal way to defend against higher costs. Joining me is Dan Sotiroff to discuss what investors should know, including the risk, tax treatment, and top-rated ETFs. He’s the associate director of US passive strategies research for Morningstar.

Thanks for joining me, Dan.

Daniel Sotiroff: You’re welcome.

Hampton: Let’s start with an explainer. What are TIPS ETFs and how do they work in practice?

Sotiroff: TIPS is just an acronym for Treasury Inflation-Protected Securities. Like ordinary Treasuries, they’re backed by the full faith and credit of the US government. They’re very, very low risk on the credit front. And like a lot of Treasury bonds, they’re issued in different maturities. So, typically five, 10, or 30 years is what the Treasury will issue them in. And then obviously as time goes on, their maturity is going to wind down. So, you can find stuff out there on the secondary market at a shorter maturity or a shorter time till they terminate.

What makes them unique is that the face value of these bonds is directly linked to inflation. And that means the CPI reading, or what we take as being sort of the public-facing measure of inflation, I guess, if you want to put it that way. So, the face value of these bonds and consequently their coupon payments are going to adjust with inflation.

And the adjustment only works up. As inflation increases, as that CPI rating increases, the face value of the bonds and their coupon payments is going to increase. It doesn’t work on the way down. So if we went through a deflationary period where CPI went down, not the environment we’re in today, but if that were to happen, the face value in the coupon payments would not adjust down. They only adjust up in your favor.

Hampton: The September Consumer Price Index shows inflation is 3.7% compared to a year ago. Are these ETFs good investments to fight off elevated inflation?

Sotiroff: Maybe, but it kind of depends on what happens versus expectations. And “expectations” is going to be the operative word, I think, throughout a lot of our conversation today. So TIPS are publicly traded bonds. That means the market can effectively price in whatever risks it wants to into the price and the yields of those bonds. That’s the big thing to remember here. Let’s say the market expects inflation is going to be 3.7% over the next five years, they can price that into the bond already. So, what’s the advantage of holding an inflation-protected bond that’s indexed to inflation? Well, it really comes down to, again, expectations. It’s going to help you out when actual inflation exceeds the expectations that are already baked into the bonds. It’s when you have a dislocation, when inflation really takes off relative to those expectations, that’s where the TIP bond is really going to pay off versus an ordinary Treasury bond that you could go out and buy today.

Hampton: Currently, TIPS’ real yield sits above the rate of inflation. What’s significant about this, and what signal is that sending to bond investors?

Sotiroff: Well, if you were to go out and purchase a TIPS bond and hold it to maturity, it’s telling you roughly the return that you would get after inflation, so the real yield, or the real return. You have to be a lot more careful when you start looking at ETFs and mutual funds because those ETFs and mutual funds can trade in and out of TIPS. That real yield could change and evolve over time, and then the prices are going to adjust day to day and everything like that. It’s not going to be the same experience in an actual fund versus holding the actual bond. And that gets into that whole dynamic that we talk about sometimes of holding a bond ETF or a bond mutual fund versus the actual underlying bond itself. You get somewhat of a different experience in that way. Just be aware of that if you’re looking at real yields and potentially getting into a TIPS ETF today.

Hampton: Where are investors putting their money when it comes to TIPS ETFs so far in 2026?

Sotiroff: So far this year, a lot of the money is going into ETFs that are targeting short-term TIPS. So those in the zero- to five-year sort of range. There’s good reason for that. I think we’re going to talk a little bit about that later on. I don’t want to get into your other questions you had here. The other thing that’s really noticeable, and this is great from someone who sits in my job, and it sort of gets to one of the things we preach, is that a lot of it is going into really, really low-cost ETFs as well. A lot of them are index-tracking, and index-tracking actually works pretty well in tips. So that’s actually a good thing. But again, the fact that people are aware that fees matter and they’re going after the lower-fee ETFs is really a positive sign.

Hampton: How has TIPS ETFs’ performance compared to the broader bond market?

Sotiroff: If we’re looking at a broad TIPS ETF versus a broader, let’s say, just Treasuries ETF, that’s probably the most relevant comparison, I would say. Since 2022, they’ve been really relatively flat, so say for the last five years or so. Really, what that’s telling us is that the realized inflation has matched expectations that were baked into the bond prices, kind of like I was getting at before. Again, that operative word of expectations. There was a big advantage, though, starting in mid-2020 and through 2021, the broader TIPS fund did actually outperform the broader Treasuries basket. And the reason was we were going through that period coming out of covid, inflation was starting to take off, and it was exceeding what was baked into the prices of TIPS in particular. And so that’s why you saw it. I think back to that time period, we were hearing all these stories about transitory inflation, and it’s safe to say that the rate of inflation increased at a steeper rate than people were expecting and maybe lasted a little bit longer than they expected, but that’s where TIPS paid off.

And it goes back to what I was saying before is that inflation exceeded expectations, and TIPS worked as expected.

Hampton: The Federal Reserve is expected to raise interest rates at least one more time in 2026. Would higher interest rates pose a risk to these investments?

Sotiroff: Well, the risk here would be the same as any other bond. Bond prices decline as rates increase. Those mechanics hold for every type of bond out there, just about, except floating-rate bonds. So what this is going to get to is the maturity of a TIPS bond or an ETF that holds TIPS bonds. There’s a corresponding duration risk, and that’s something you have to be mindful of as you look at which TIPS ETF you want to get into.

Hampton: Let’s talk TIPS that hold short-term investments versus those that hold much longer ones. What are the risks here, Dan?

Sotiroff: This is kind of going back to the last question. It’s a really important distinguishing factor between the two. So, you’ve got the short-dated ones and then the longer-dated ones. Both adjust for inflation in the same way, at the same rate. The inflation adjustment is going to be identical between all of them across the maturity spectrum. The longer-term TIPS ETFs are going to be more sensitive to interest rate changes, and that’s just because they have longer maturities and longer durations. So, we think about the recent rate increase that we had a few weeks ago: Longer-term TIPS had a bigger decline in value than those that had shorter maturities and shorter durations. And that’s just, again, bond mechanics. That’s what we would expect to see. Longer-term TIPS funds that are a little bit riskier in that regard, they’ve got a little bit more duration risk than those that focus on more of the short-term TIPS.

Depending on the market environment we’re in, duration risk can sometimes overwhelm the benefits of just the inflation protection that’s baked into the TIPS fund. That’s another thing you have to consider when you’re looking at TIPS ETFs or TIPS mutual funds here: What are the risks that you’re taking on? Sometimes that duration risk might not be worth it because it could overwhelm any benefits that you’re getting from the inflation protection.

Hampton: Let’s time-stamp because we are recording this episode on Wednesday, Oct. 14, just before 11 a.m.

Sotiroff: Yep.

Hampton: All right. What’s the tax treatment for TIPS ETFs? Is it better to hold them in a taxable, tax-deferred, or tax-free account?

Sotiroff: It’s a good question, but the answer here is pretty short and straightforward, I think. It should not be surprising. These are regular taxable bonds in a lot of senses. So, the tax rules that apply to regular Treasuries and a lot of other bonds are going to apply to these as well. It’s going to be ordinary income based on your tax bracket. Best use them in a tax-deferred or tax-free account.

Hampton: Besides retirees, who else could benefit from adding TIPS ETFs to their portfolio?

Sotiroff: Maybe I’ll answer this in a reverse way. I don’t see a lot of use of these for younger investors, primarily because they’re going to be heavily invested in stocks. They’ve got that long runway. They can take more risk if they can deal with that risk. And over the long run, stocks are an excellent hedge against inflation. They typically provide a much higher real return, or after-inflation return, compared to any types of bonds, including TIPS. So, stocks, great inflation hedge.

The one place you could probably use them if you’re younger, you’re more in that accumulation phase, is maybe if you’re saving up for a really big purchase, like a down payment on a car or a house or something like that. You know you’re going to make that purchase in the next year, two years, three years, whatever it may be, and you want to protect against unexpected inflation that can hit those types of assets if you were making those big purchases. That could be something where maybe you use a short-term TIPS fund to maybe hedge that risk away a little bit. That’s maybe one use case, but outside of that, it’s really going to be more of the preretirees and retirees that I think these are going to be most appealing toward.

Hampton: Are we still in the young investor camp?

Sotiroff: Maybe, a little bit.

Hampton: Let’s hold on. So, which TIPS ETFs earn a Gold or Silver rating for Morningstar?

Sotiroff: Like I said, indexing works really, really well in TIPS, so I think that’s a good place to start. Let’s break this down. There are two broad categories that Morningstar classifies TIPS ETFs into. The first one is the inflation-protected bond category. That’s where you’re going to find your broad TIPS ETFs. That’s going to be the types of ETFs that hold those longer-maturity and longer-dated types of TIPS bonds. So in that category, we’ve got the Schwab U.S. TIPS ETF, ticker SCHP, charges just 3 basis points, so really cheap access to the broader TIPS bond market.

We have a very close competitor from Vanguard: Vanguard Total Inflation-Protected Securities ETF, ticker VTP. That’s only about a year old. It just launched in July of last year, but competitively priced at 5 basis points. And we know Vanguard, as that fund probably gets bigger, it’s probably going to get cheaper over time. It’s still relatively small, but I think it’s big enough that you could consider it as a reasonable investment at this point. It seems like it’s got some good money behind it.

And then the third one here is an honorable mention. It’s actually a mutual fund. It’s actively managed Vanguard Inflation-Protected Securities Fund VIPSX; the investor share class is priced at 20 basis points, so still really cheap within the category, and it holds mostly TIPS. It’s not holding some of the more esoteric stuff that maybe some of the competitors in the category are holding. So, it’s going to be somewhat comparable to an index fund with an element of active management in there to take advantage of some opportunities to add some value here and there around the edges. So, that’s the broad inflation-protected bond category.

The other category is the short-term inflation-protected bond category, which, as you can guess by the way it’s named, is more focused on the short-term TIPS that we’ve been talking about up to this point. So, it’s going to focus more on ETFs built around TIPS with zero to five years roughly to maturity. It’s going to eliminate a lot of that duration risk that we’ve been talking about. This is going to be more of the pure play on the inflation-protection component of these bonds.

And in that category, two index-tracking options: The first one, Vanguard Short-Term Inflation-Protected Securities ETF. The ticker is VTIP, pretty easy one to remember. Also charges 3 basis points, so very cheap. And then the competitor to that from BlackRock is iShares 0-5 Year TIPS Bond ETF, ticker STIP. Also charges 3 basis points. Can’t go wrong with either one. They’re both going to give you access to the short-term TIPS market. Again, more of that pure play on the inflation-protected component, less on the duration risk. Those are great options. That’s where I would start.

And if you want to look more at some of the actively managed options in those categories, those are more going to be a mutual fund yet. We’re not seeing those really come out in ETFs, but they’re out there as well.

Hampton: What are the key takeaways concerning TIPS ETFs for investors out there?

Sotiroff: There are two things I would really go back to here. Despite the name, the benefits of these bonds are really about shielding you from the unexpected increases in inflation. It all comes back to that “expectations” that we have to remember. And then the second one is kind of what we were hinting at when I was giving you some of these top picks in the categories is stick to the short-term ETFs if you really want sort of that pure play on the inflation protection. If you go the longer-term route, you’re adding an element of duration risk into the mix, and that may or may not pay off as much. So, just be careful with that and make sure you consider that before you get into one of these.

Hampton: The word of the episode: expectations.

Sotiroff: Expectations as always.

Hampton: Dan, thank you for coming to the table.

Sotiroff: You’re very welcome.

Hampton: That wraps up this week’s episode. But first, a correction from the Oct. 9 episode. It stated, “That an investor can use $5,000 from a tax refund to purchase I bonds in excess of the $10,000 limit.” The US Treasury discontinued this tax-refund option on Jan. 1, 2025.

I appreciate you for checking out this week’s Investing Insights. Thanks to senior video producer Jake VanKersen and associate multimedia editor Jess Bebel. I’m Ivanna Hampton, editorial multimedia manager at Morningstar. Take care.