TIPS ETFs: What to Know about the Pros and Cons Amid Inflation

Ivanna Hampton: Welcome to Investing Insights. I‘m your host, Ivanna Hampton.

Concerns about sticky inflation are sending many investors looking for a direct hedge against it. Treasury Inflation-Protected Securities, or TIPS, are designed to do that. You can buy TIPS bonds directly or invest in funds that do it for you. Exchange-traded funds provide an easier way to invest in TIPS. However, there are still risks investors should consider before tweaking their portfolios. Dan Sotiroff is a senior manager research analyst for Morningstar Research Services. I spoke with Morningstar’s new ETFInvestor editor about what you should know before investing in TIPS ETFs.

Thanks for being here, Dan. And congratulations on your new role as editor of Morningstar’s ETFInvestor newsletter.

Dan Sotiroff: Thank you, Ivanna. It’s great to be back and to see you again.

What Are TIPS?

Hampton: Well, let’s get down to business. Before we get into what TIPS ETFs are, let’s first start with, what are TIPS, and how do they work?

Sotiroff: So TIPS is just an acronym. It stands for Treasury Inflation-Protected Security and that kind of describes what a TIPS is, right? In most ways, it’s gonna be pretty much identical to a regular Treasury bond, except for one key difference, and that’s the inflation-protected component of it. So basically, what that means is that the interest payments that you receive and the face value of the bond are gonna adjust for inflation. So as the CPI number ticks up higher and higher every year, the face value of the bond and the interest payments that you receive are going to commensurately tick up higher and higher over time. So that’s basically the idea, is that you’re just getting some inflation protection on those components of the bond that you’re investing in.

TIPS ETFs vs. TIPS

Hampton: Can you talk about the similarities and differences between owning a TIPS directly or own it through an exchange-traded fund?

Sotiroff: Sure. So that’s a great question, and really what it’s going to come down to is like, what I would say is the optics. It’s what you’re gonna see or what you’re not going to see, right? So maybe an example would help sort of explain what’s going on here. So let’s say you went out and you bought a 10-year TIPS today, and you went out and you bought an ETF that was holding that same TIPS bond, right? So you have the ETF and the bond itself, equivalent in every way. If you bought those on the same day, held them for the full 10 years to maturity, you’re going to get basically the same experience. The interest payments you’re going to get, the total return that you’re going to realize over those 10 years is going to be identical.

Where the difference is going to come in is what happens between point A and point B, if you want to think of it that way, right? So, you think about, like TIPS are traded in a market and so is an ETF. So as things like inflation changes, as interest rates change, the value of that bond is gonna change. The ETF is going to have to change its price to reflect the changes in the value of that bond, so it’s going to change, you know, minute by minute if changes are occurring that quickly, day by day, hour by hour, etc.

The bond that you hold in your brokerage account isn’t going to change because it’s not trading. It’s just sitting in your account. So it’s going to look more stable optically, but behind the scenes, the value of that bond is actually changing, you just don’t see it. You’re not going to see that until you actually go to sell that bond before maturity, and then you’ll see that the value was maybe not what you thought it was, or maybe it’s higher than what you thought it was. So, that’s really the difference, is just kind of what you’re seeing. You’re going to see the prices update on the ETF much more frequently, whereas the bond that you’re holding in your brokerage account isn’t going to be changing that frequently, if at all.

Hampton: I love an example. Thank you for that.

Sotiroff: Sure. No problem.

Flows Into TIPS ETFs in 2025 Surprises Morningstar’s ETFInvestor Editor

Hampton: Let’s get into the data. How much money has flowed into TIPS ETFs in 2025 through the end of April compared with the same time last year, and what is that telling you?

Sotiroff: Sure. So I was actually a little bit surprised about this. The flows are actually pretty tepid. Like, there’s not a lot of interest in this. So if we go back to the first four months of 2024, we saw about $2.2 billion come out of TIPS funds. This year, we saw about $3.7 billion go in over the first couple of months. Now, you could say, like, it seems like there’s more interest this year than last year, but then you realize that there’s over $230 billion in inflation-protected bonds, so you’re really talking about flows that are on the order of like maybe 1% to 2% of the total assets in all of these funds. So, you know, maybe there’s some interest this year, a little more interest, but it’s really at the margins if we’re seeing… I was kind of surprised because we have had talk about inflation expectations with tariffs and everything coming in. So I thought it was going to be higher, but just not a lot of interest there, I guess.

How TIPS Have Performed Against the Bond Market in 2025

Hampton: Got it. So what has been their performance against the broader bond market this year?

Sotiroff: They’ve actually done pretty good. I think they outperformed like a broader bond market. So, let me back up. If you look at sort of a broad TIPS fund like Schwab TIPS ETF, the ticker is SCHP, that outperformed a broad bond market ETF like Vanguard Total Bond Market ETF by about 1 percentage point. Maybe it was a little higher than that, but it’s about 1 percentage point. Really, a lot of that is really just because Treasuries held up better, right? We had a lot of volatility in the first four months of the year. Treasuries did pretty well. The broader bond market has a lot of corporate bonds that are a little more closely tied to stocks and so they kind of wavered a little bit and they didn’t perform as well. So that’s really the difference, is just sort of the credit risk component there, and that’s why they held up a little bit better than the broader market.

How Higher-for-Longer Interest Rates Could Create Higher Risk

Hampton: What if interest rates stay higher for longer? Talk about the interest-rate risks that TIPS face.

Sotiroff: It’s not unlike any other bond, right? They have a maturity, and therefore they have a duration or an interest-rate risk component to them. So, as interest rates move up and down, the bonds commensurately are going to move down or up in the opposing direction. So it’s the same as any other bond in that regard and that is one thing you have to look out for. As you take on TIPS with longer and longer maturities, there’s more and more of that interest-rate risk that you’re going to have to be aware of, whereas the shorter ones are not going to have as much interest-rate risk tied to them.

Should Investors Look to Short- or Long-Term TIPS During Market Volatility?

Hampton: Should investors consider short-term TIPS over long-term TIPS in this challenging market environment?

Sotiroff: It really comes down to what are you looking to do, right? And I don’t think you should really make a decision based on what the market’s doing. You want to be in control of what you’re actually doing here. They have a very specific use case, and you should make that decision based on their use case. First, they’re bonds, so you should be thinking here of like capital preservation. You want to shield your money from some big risk out there, like a market crash or something like that. Or, I think of like retirees in this regard. If you’re approaching retirement or you’re in retirement, you want more of that capital preservation, TIPS can work well there.

The second thing is really it gets down to inflation expectations. So, TIPS really shield against unexpected inflation and the emphasis really needs to be on the unexpected component. If you think that inflation is going to be higher than what the expectations are today, then you would go into a TIPS bond versus like a regular Treasury or something like that. So, it’s those two things. It’s one, do you need fixed income, first of all, and then two, do you have some other expectation of inflation that the market isn’t pricing in today?

Hampton: I feel like we should highlight the word “unexpected.”

Sotiroff: “Unexpected” cannot be emphasized enough with these things because I think a lot of people see that inflation-protection thing, and they think, “Oh, great.” And then they don’t realize it’s really “unexpected” inflation, right.

What’s the Best Account to Hold TIPS ETFs?

Hampton: Good point. So, investors can buy TIPS ETFs in their brokerage account. What is the tax treatment like, when you compare it to individual bonds, and where should folks hold these ETFs?

Sotiroff: It‘s identical because, again, it’s a bond. Most of the total return is going to be coming from those interest payments that you receive from the bond and those are taxed at ordinary income rates, just like any other bond. Really, you should be putting these things into tax-deferred accounts whenever possible. That means like an IRA, 401(k), anything like that where you have some tax advantage that’s going to shield you from the effects of having to pay taxes upfront. That’s really the advantage that you should be looking for.

Who Should Invest in TIPS ETFs?

Hampton: What type of investor should consider adding TIPS ETFs to their portfolio?

Sotiroff: So again, it’s a Treasury bond, right? So, that first question is: Do you want some sort of safe harbor for your assets, right? Again, it’s more of the retirees, maybe the capital preservation, or maybe if you’re saving up for something and you’re young. You’re saving up for a down payment on a house and you want to preserve your money. And then it gets back to the inflation-expectation component of this, right? So, when you look at TIPS bonds, there is an inflation expectation that’s baked into them. Right now, it’s around 2.3% if you look at the breakeven inflation rate, and that’s over the next 10 years at an annualized rate. If inflation comes in higher than that 2.3% that’s quoted today, the TIPS is going to return commensurately higher than that. And you would be better off holding the TIPS bond than, say, the equivalent Treasury bond. If inflation comes in lower than that, you are probably going to be better off holding the Treasury bond.

So, the way I think about this is, if you look at something like the target-date funds that have these glide paths, usually what you see happening toward the end of those is like the investors getting into like their 50s and 60s, that’s when you start to see TIPS starting to be folded into the glide path. But they never go all-in on TIPS. They usually have some component of other bonds, just normal Treasury bonds, corporate bonds, and some element of TIPS, and that’s because we don’t really know which direction inflation’s going to go relative to expectations, right? So, from that perspective, it’s useful to maybe have a mix of both TIPS and maybe some regular bonds as well, just because you don’t know what’s going to happen with inflation.

Hampton: We do not know.

Sotiroff: No, nobody does. Right?

2 Top TIPS ETFs Picks

Hampton: And as we wrap up our conversation, name a few TIPS ETFs that Morningstar thinks are topnotch.

Sotiroff: Yeah. So, there’s really two that come to mind, both are Gold-rated, and they charge actually the same fee, and they’re cheap on top of that. So, the first one I think I mentioned before was the Schwab TIPS ETF. The ticker is SCHP. That’s just a broad TIPS ETF, so that’s going to own everything from like very, very short-term stuff that’s going to be maturing in maybe the next year or few months all the way up to stuff that maybe has 20, 30 years left to mature. So, it’s gonna be very broad. It’s basically gonna mimic the TIPS market. And then we have one that’s more at the shorter end of the spectrum. That’s the Vanguard Short-Term Inflation-Protected Securities ETF. A little bit of a mouthful there. The ticker on that one is VTIP, or VTIP, and that holds TIPS with five years or less to maturity.

• Schwab US TIPS ETF SCHP
• Vanguard Short-Term Inflation-Protected Securities ETF VTIP

So, the main advantage of the short-term one is that you’re basically getting rid of a lot of that interest-rate risk, and it’s going to be more of that pure play on just the inflation-protection component of it. And that’s why you might really consider a shorter-term one over a longer-term one, like we were kind of talking about before. So, those are the two. They’re both rated Gold, and both charging 3 basis points a year, so they’re very cheap and that’s why we like them.

Hampton: Well, Dan, thank you for coming to the table and discussing the pros and cons of TIPS ETFs.

Sotiroff: Absolutely. You’re very welcome.

Hampton: That wraps up this week’s episode. Thanks for watching and making this show part of your day. Subscribe to Morningstar’s YouTube channel to see new videos about investment ideas, market trends, and analyst insights. Thanks to senior video producer Jake VanKersen and associate multimedia editor Jessica Bebel. I’m Ivanna Hampton, lead multimedia editor at Morningstar. Take care.