Cobbled together some different sources on TIPS for readers who want to follow up: a comprehensive website, a helpful YouTube channel, and then excerpts from Risk Parity classics by Shahidi, Qian, and Dalio. May follow up with some academic articles, if I can find some good ones!
Resources on TIPS have been a bit hard to come by. Compared to REITs in the last RPC Investigates series, it has been tougher to find academic articles on TIPS and what there is has focused primarily on individual TIPS. What I have found has been pretty old - there was a great flurry of research in the late 1990s and early 2000s after they were introduced in 1997, but they don’t seem to have gotten all that much attention either in academia or among professionals since then.
I’ll keep looking, though, and may have a second Risk Parity Resources post on TIPS if I find some worthwhile pieces. For now, though, here are some resources to get you started:
1) TIPS Watch
All you want to know about individual TIPS from soup to nuts: the basics, how to buy them, how they compare to nominal Treasuries and I Bonds, how to construct a TIPS ladder…literally, everything you could possibly ask about TIPS is answered somewhere in here. Writing and explanations are accessible and advanced at the same time.
The author, David Enna, is a former financial journalist and is dedicated to helping individual investors figure things out for themselves instead of pushing them into commission-paying products. It is a wonderful example of a passion project on a niche investing topic (!)... Great work, Mr. Enna!
2) Diamond NestEgg
This is just one video, but really the whole YouTube channel is helpful for all things related to inflation-protected bonds, especially these days with inflation so much in the news. Most recent posts discuss either TIPS or I Bonds, including a really helpful video that compares the two. Also has some recent posts on "brokered" CDs (which honestly, I hadn’t heard of before seeing it in the video). Earlier posts cover the spectrum of financial planning topics, including posts on student loans, Health Savings Accounts, and life insurance. The host, Jennifer, is clear, concise, and a trustworthy source.
3) “Risk Parity: How to Invest for All Market Environments” by Alex Shahidi. Chapter 5, pages 51 to 63.
You can read my review of Shahidi’s book here:
While the whole book is wroth a read, I found it very helpful to re-read chapter 5 recently, as it provides a full description of TIPS and the role they can play in saving portfolios when the dreaded “rising inflation” and “falling growth” economic regimes come around.
Shahidi is Managing Partner and co-CIO at Evoke Advisors, and part of the team behind RPAR and UPAR, two of the handful of Risk Parity ETFs on the market. In RPAR, for example, the allocation to TIPS is quite high, as TIPS account for 29.2% of the portfolio. The full explanation behind that allocation is given in the book. To be clear, I don’t currently share Shahidi’s enthusiasm for TIPS, and for me, questions still remain (which is why I am doing this series!), but this is a highly recommended read to get a sense of the pro-TIPS perspective.
4) “Risk Parity Fundamentals” by Edward Qian. Chapter 6, part 5 “Risk Parity and Inflation”
You can read my full review of Qian's book here:
Qian’s book on Risk Parity does not have a section on TIPS exactly, but due to a heads up from an astute reader (thanks, PF!), I searched more closely and found this great section that indirectly covers the case for TIPS. It’s basically a look back at the 1970s, with estimations about how a generic Risk Parity framework would have been for investors.
In short, quite well! A 60/40 portfolio would have returned 6.5% for the tumultuous decade, which doesn’t seem that bad until you learn that that was nominal return. With inflation at 7.4% for the decade, it actually lost ground. Qian’s reconstructed risk parity portfolio, meanwhile, returned 10.5% in nominal terms, thus 3.1% in real terms (159).
The main reasons for that performance were higher allocations to commodities and to an estimated version of TIPS. Since TIPS didn’t actually exist during the decade, Qian simulated their performance using “prevailing real yields, derived from nominal bond yield and long-term inflation” (158). Here’s a handy chart which estimates (1970-1996) and then records (1997-) TIPS returns over the decades:
Qian also provides a breakdown of the performance of the major asset classes for each year in the decade (160). The outperformance of TIPS compared to equities and bonds is notable, plus the way TIPS exceeded the Consumer Price Index, save for 1977, ‘78, and ‘79. Also intriguing (and something we’ll come back to!) is that commodities really outperformed the other asset classes, except for two striking years (1975 and ‘76) when commodities crashed while other asset classes boomed, even in real terms.
5) "All Weather Story” by Ray Dalio and others at Bridgewater
There is but a brief mention of TIPS here, but if you’re interested in the origin of TIPS in the United States, Ray Dalio and others from Bridgewater discuss their origin in the “All Weather Story.” On pages 7 and 8, they discuss inflation-linked bonds as the final ingredient to the risk parity puzzle – an asset that would stay above water with rising levels of inflation.
And here is my review of the paper. At the top, you can find a quick link to the paper itself: