Q: I have read a lot of articles about the pros and cons of TIPS. You recommend the Vanguard intermediate-term TIPS. It seems a lot more volatile than the short term TIPS. Is the expected return worth the extra risk?
A: I have spoken with a number of experts about short-term vs. intermediate-term TIPS. The expectation is that the difference in return between short and intermediate TIPS will be similar to the difference between short and intermediate term bonds. Over the last 15 years, the Vanguard Short-Term Treasury Fund compounded at 3.7% vs. the Vanguard Intermediate Term Treasury at 5.8%. Of course both the intermediate Treasuries and intermediate TIPS are more volatile than short-term treasuries and short-term TIPS. If investors are uncomfortable with the additional volatility of the intermediate-term TIPS, it is okay to move to the less risky short-term TIPS, but expect a lower long term return.