Do TIPS Live Up to Their Promise?

This edition of Indie Insights™ takes a second look at a topic raised in a Wall Street Journal article published last November. I wanted to provide my take on the subject because it has the potential to lead investors to believe that TIPS may not provide effective inflation protection, and I do not believe that is true.

“Inflation-Protected Bonds Fail a Key Test: They Don’t Help When Inflation is High”, by Derek Horstmeyer, was originally published in WSJ’s Personal Finance section November 13, 2025. Though I do not doubt the underlying data, I feel the article’s methodology, as well as its interpretations and commentary, may be confusing or potentially misleading.

The article’s main critique of TIPS is that buying them when inflation is relatively high may not lead to inflation protection. On its face, this is an odd criticism. If you buy protection after a threat has materialized, you obviously have not protected yourself.

Professor Horstmeyer frames this as a need to time the market in order to get inflation protection from investing in TIPS. He states, “One can’t get into TIPS after inflation has already skyrocketed and expect protection. Only if you are early to the game and see inflation ticking up before others do will you gain a little extra return by jumping into TIPS ahead of the rest of the market.”

I think about allocating to TIPS differently. They obviously do not provide a hedge against inflation that has already occurred, nor do they hedge against inflation that is broadly expected to occur. If inflation always materialized exactly as it is expected to, there would be no difference between investing in TIPS or nominal treasuries. How do we know what the market’s inflation expectations are? There is a handy way to observe this, which is the breakeven inflation rate – the difference in yield between TIPS and nominal treasuries of similar maturity.

TIPS provide protection against future unexpected inflation. They do this very effectively. You don’t have to time the market to benefit from this protection. You just need to hold them in your portfolio.

The WSJ article’s Corrections & Amplifications, published after the original version, states, “Investing in TIPS and holding them to maturity is good for inflation protection. However, timing matters when investing in a TIPS fund.” I therefore take the main criticism not really to be about TIPS but about investing in a fund rather than individual securities.

Like any fixed income security, the value of TIPS is sensitive to interest rates. And, like investing in any fixed income security, you may have a somewhat different experience depending on whether you hold individual securities or a fund. Think about the structural source of the difference – ignoring asset management fees for a moment.

Most bond funds hold a portfolio of securities. Over the course of a given period, there will be bonds that are sold or mature and there will be bonds added through new issuance or the secondary market. The typical fixed income fund itself never matures; it just keeps rolling along. In a typical case, you might own a fund with thousands of securities. The portfolio has a weighted average duration and maturity, which generally remain fairly constrained. Some funds explicitly limit their average duration and/or maturity to a specified range.

Herein lies the source for most of the experiential difference between owning a fixed income fund and owning fixed income securities directly. Generally speaking, because most fixed income funds keep rolling along without maturing, they do not offer a diminution in average duration and maturity over time. Meaning their rate risk remains relatively constant rather than diminishing over time. However, they do offer daily liquidity at a fair price. So, there is generally a fair tradeoff between holding a fund versus holding individual bonds or other fixed income securities like TIPS.

Rather than assessing total returns on a month-to-month basis, it may be more helpful to evaluate TIPS funds on a longer-term basis corresponding roughly with a fund’s average maturity and/or duration. Performance comparisons against CPI and nominal treasury funds of similar duration might also be valuable.

Lastly, one more important note from the world of financial product development. Blackrock now offers a family of term ETF’s that seem to combine the best of both worlds at a reasonable fee. They are fixed income funds with intraday liquidity and a fixed termination date! This is not an investment recommendation, but they may be an option for some investors seeking such a solution. They come in both nominal and inflation-protected flavors. Do your homework before investing to ensure they meet your needs and are appropriate for your circumstances and risk profile. You can explore more about them here.

© 2026 Philip Murphy. All rights reserved. The information presented is the opinion of the author and does not reflect the views of any other person or entity unless specified. The information provided is believed to be reliable and obtained from reliable sources, but no liability is accepted for inaccuracies. The information provided is for informational purposes and should not be construed as advice. Advisory services offered through IndiePlan™ LLC, an investment adviser registered with the state of New York.