If you’re worried about inflation, you may be interested in equipping your portfolio with Treasury inflation-protected securities (TIPS).
TIPS are bonds issued by the federal government, making them some of the safest investments around. Plus, they’re designed to keep pace with inflation based on the consumer price index.
TIPS can add inflation defense as well as volatility protection to your portfolio. But it’s important to understand how TIPS work and what their risks are before you decide to invest.
How Do TIPS Work?
You can purchase TIPS from the government through TreasuryDirect, in increments of $100, with maturities spanning 5, 10, or 30 years.TIPS pay inflation-protected interest every six months. Here’s how that works.
Suppose you purchase $1,000 worth of TIPS with a 3 percent coupon rate. During the first year, inflation is 10 percent. That means the principal or face value of your TIPS would rise by 10 percent to $1,100 (10 percent of $1,000).
And because your interest payments are based on the new face value, the annual coupon payment would be $33 (3 percent of $1,100). This means you get $16.50 every six months.
And at the end of its term when the TIPS mature, you either get back what you paid or the inflation-adjusted principal, whichever is higher.
As you can see, the returns could be higher if you purchase a substantial amount of TIPS—if your risk tolerance allows for it.
The Benefits of Investing in TIPS
TIPS are backed by the full faith and credit of the U.S. government. This provides a layer of safety and volatility protection to your portfolio, especially in times of market downturns when your stocks may be suffering.Because of how they are adjusted to inflation, TIPS offer a “real” return. This means that the purchasing power of your interest payments won’t be eroded by inflation, as is the case with normal or nominal bonds. Moreover, your principal can actually rise with inflation at maturity. These are unique features not shared with nominal bonds.
But you don’t have to purchase individual TIPS to gain exposure to these securities. You can also seek a low-cost TIPS ETF or TIPS mutual fund. These are professionally managed funds that invest in TIPS with different maturities, offering risk protection as opposed to buying individual bonds.
Here are some top TIPS ETFs and mutual funds.
- Vanguard Inflation-Protected Securities Fund Admiral Shares
- SPDR® Portfolio TIPS ETF
- iShares TIPS Bond ETF
- Schwab U.S. TIPS ETF
- FlexShares iBoxx 5Yr Target Dur TIPS ETF
- PIMCO 15+ Year U.S. TIPS ETF
Risks of Investing in TIPS
Although TIPS bypass inflation risk, they don’t avoid interest rate risk. When interest rates rise, the value of TIPS goes down. This is because newer TIPS with higher yields are more attractive to investors.And if deflation occurs, the principal of your TIPS will adjust downward from a higher inflation-adjusted increase. The interest payments will then reflect the lower principal. But at maturity, you’ll never get less than what you paid for. So if you bought $1,000 in TIPS and the adjusted principal reduces to $950 at maturity, you will still get $1,000 back.
Additionally, despite their safety, TIPS likely won’t generate returns higher than stocks will. But this doesn’t mean they don’t deserve a place in your portfolio, especially for retirement savers who seek strong fixed-income investments.
How to Invest in TIPS
Although investing directly through the Treasury is simplest, you can also buy TIPS through a brokerage account. This could make it easier to sell your TIPS on the secondary market.Most experts recommend you dedicate one-third to one-half of the fixed-income portion of your portfolio to TIPS.
The Bottom Line
TIPS are among the safest fixed-income investments you can get. And their inflation protection makes these securities unique. They can add diversification as well as volatility and risk protection to your fixed-income portfolio.TIPS can’t overcome interest rate risk. Nonetheless, they can play a vital role in a well-diversified portfolio armed with allocations to stocks and nominal bonds.
You can also consider Treasury bonds or T-bonds, which are long-term Treasury securities that pay interest every six months.
The Epoch Times copyright © 2025. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.
