Why is VTIP not tracking inflation?

Question

A while back I moved a portion of my wealth into inflation protected bonds as I needed a store of value that could preserve my purchasing power through the current high rates of inflation we were seeing. I ended up buying VTIP, the Vanguard ETF with TIPS of 2.5 year average maturity.

I am struggling to understand how its price is tracking with inflation and rates/yields. So far it's been fairly flat i.e. hasn't really gone up in value to track the high rates of inflation of 2021 and all I'm seeing is now they lose value in response to rates rising. While I expected the latter and kept the maturity at 2.5 years to cap interest-rate related drawdowns, I am not understanding the former.

Would appreciate any insights on this. I had a specific goal in purchasing this TIPS ETF and I have unfortunately failed :(

Answer 1

TIPS (and the ETFs that hold them) protect against unexpected inflation. IF you buy an individual TIPS bond, you are guaranteed a real rate of return - meaning the principal of the bond is increased with inflation. But they are priced based on the market's expectation of inflation - so they only go up in value if inflation is higher than expected. You pay a premium upfront to guarantee a real rate of return.

Since many people have been expecting inflation to increase ever since stimulus payments started, it's not surprising to see that their market value is flat.

Answer 2

TIPS are only inflation protected if you (or the ETF) holds them to maturity, and the average maturity in VTIP is 2.5 years, so many of those TIPS won't have matured yet (and VTIP will keep rolling them over). Before they mature, the actual price of each TIPS bond is going to fluctuate, and that's reflected in the NAV of the ETF.

This answer talks a little about the difference between a TIPS and a CD over the life of the instrument (before maturity).

The amounts you can buy each year are smaller, but have you considered I Bonds?