TIPS Ladder Palooza

Alpha Architect posted an article that was both interesting and vague. Interesting because it was about building a portfolio that was a blend of TIPS (ladder) and equities that favored TIPS. The weightings are what was vague. It talked about a process to determine the weightings but did not offer or explore any proposed weightings. 

The TIPS sleeve is intended to "deliver a real, predictable" income stream. IRL, this point is why you should use individual issues not ETFs. The equity sleeve would provide growth to rebalance into more TIPS over time and increase the income potentially or make the ladder last longer. 

I've come to believe that anyone interested in TIPS is better off in individual issues than funds. They are also simpler to hold in IRAs than taxable accounts. I am not a fan of going heavy TIPS but for exploring portfolio theory, why not? 

iShares has a suite of single year maturity TIPS fund similar to Invesco's Bullet Shares suite that offers corporates and high yield. The iShares funds' symbol methodology is that IBID is for 2027 for example, IBIF is 2029, IBIH is 2031 and IBIJ is 2033 and those are the funds we'll use for this post. 

First lets look at the TIPS sleeve by itself and a couple of substitutes that do not use equity proxies. 

Both Copilot and the iShares website shows the real yield for the IBIx funds to be less than 2%. Copilot generically used 3% as an assumption for inflation but it was not clear what data point iShares was using for inflation to calculate the real yield. To keep it simple, we used nominal yield less the rate of inflation. 

The total return two mystery portfolios are almost all yield. The price only growth of both is less than 2%.The returns of the two mystery portfolios are compelling but I would caution against projecting those CAGR numbers forward. I would be more comfortable assuming the relatively lower volatility numbers could persist versus the iShares TIPS ladder though. And I think the mystery portfolios could continue outperform the TIPS ladder CAGR even if the spread between the two was less. 

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.