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Investing in US TIPS (Treasury Inflation Protected Securities) US
Investing in US TIPS (Treasury Inflation Protected Securities) US
As TIPS are on a positive interest rate + US inflation to maturity I am considering adding them to my portfolio. I am aware of currency risk but looking at the history of the pound dollar exchange rate I am not worried and could always choose my moment to sell.
I do not need the money and this is purely to protect capital so I am happy to hold them to maturity or update on a rolling ladder basis.
I have both ISA and non ISA accounts & would be very interested to read comments on the best way to do this. My current platform (Halifax) seem to charge rather high currency exchange fees. (1.5% I believe).
I am aware of the 2 iShares TIPS bond ETF funds
I do not need the money and this is purely to protect capital so I am happy to hold them to maturity or update on a rolling ladder basis.
I have both ISA and non ISA accounts & would be very interested to read comments on the best way to do this. My current platform (Halifax) seem to charge rather high currency exchange fees. (1.5% I believe).
I am aware of the 2 iShares TIPS bond ETF funds
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- Lemon Slice
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Re: Investing in US TIPS (Treasury Inflation Protected Securities) US
If we assume one's native currency is not $US, then we are protected from interest rate changes by holding the TIPS to maturity. Doing so removes the ability to 'choose my moment to sell' if the exchange rate goes sour. Or, the other way around, jump out if the exchange rate turns bad, but suffer the consequences of unfavourable interest rate change(s). Not to mention, but I will, the inflation protection might not protect against a non-$US inflation.
Is it the best solution to whatever the challenge is?
Is it the best solution to whatever the challenge is?
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- 2 Lemon pips
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Re: Investing in US TIPS (Treasury Inflation Protected Securities) US
tug7 wrote:
I am aware of the 2 iShares TIPS bond ETF funds
None of the uk retail platforms are that useful for direct purchases of TIPS. I would use interactive brokers for non ISA/pension ownership of these. Fund in whatever currency you want, convert to USD, pick the TIP maturity, buy the instrument and hold to maturity. If the spread is around 30bps, then your annual holding cost is half of that/years to maturity which is very small, a couple of basis points. Do not forget that accruing indexation for US tips is taxable as income even though it is not received annually. Here's a table of indexation factors to help you calculate this amount (as an example for a particular TIP):
https://www.treasurydirect.gov/instit/a ... =912810RW0
Within an ISA/Pension, the two tips ETFs you refer to are the most economic and sensible way - approx 0.1% ter (effectively reduction in real yield) on top of entry/exit spread.
ITPS.L Medium duration, USD exposure (ie unhedged) but quoted in GBP, so no relying on your ISA/SIPP provider's fx spread.
TIP5.L Short duration, USD exposure and quoted in USD, so you need an ISA/SIPP provider who doesn't shaft you on the fx. HL don't, they are very tight in my experience. 1.5% at Halifax is instacloseaccount territory
But both of these maintain their duration over time of course so less useful for laddering
Re: Investing in US TIPS (Treasury Inflation Protected Securities) US
Thank you for the comments.
JohnW. I may live in the UK but that has not greatly influenced my view of investments. Over time the exhchange rate and relative inflation between countries has tended to balance out. I appreciate that in the short term this can get distorted but, for me, in the longer term it holds true. Most of my money is in the US & it will stay there for the forseeable future.
Eventide. I appreciate your thoughts. I had not realised that Ishares short duration was in US dollars thus incurring extra currency costs.
I understand the impact of tax. Being taxed on inflation has always seemed to be wrong to me.
JohnW. I may live in the UK but that has not greatly influenced my view of investments. Over time the exhchange rate and relative inflation between countries has tended to balance out. I appreciate that in the short term this can get distorted but, for me, in the longer term it holds true. Most of my money is in the US & it will stay there for the forseeable future.
Eventide. I appreciate your thoughts. I had not realised that Ishares short duration was in US dollars thus incurring extra currency costs.
I understand the impact of tax. Being taxed on inflation has always seemed to be wrong to me.
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- Lemon Half
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Re: Investing in US TIPS (Treasury Inflation Protected Securities) US
tug7 wrote:I had not realised that Ishares short duration was in US dollars thus incurring extra currency costs.
TP05 is the GBP version of TIP5. See "Listings" towards the bottom of:
https://www.ishares.com/uk/individual/en/products/287202/ishares-tips-0-5-ucits-etf-fund
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- Lemon Quarter
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Re: Investing in US TIPS (Treasury Inflation Protected Securities) US
tug7 wrote:Thank you for the comments.
JohnW. I may live in the UK but that has not greatly influenced my view of investments. Over time the exhchange rate and relative inflation between countries has tended to balance out. I appreciate that in the short term this can get distorted but, for me, in the longer term it holds true. Most of my money is in the US & it will stay there for the forseeable future.
Eventide. I appreciate your thoughts. I had not realised that Ishares short duration was in US dollars thus incurring extra currency costs.
I understand the impact of tax. Being taxed on inflation has always seemed to be wrong to me.
AFAIAA the indexation of TIPS is only taxable in the UK as a capital gain at the point you dispose of them.
I think the link about this above was a US website for US taxpayers, not UK ones
The indexation of UK gilts is not taxable in the UK
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- Lemon Quarter
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Re: Investing in US TIPS (Treasury Inflation Protected Securities) US
mc2fool wrote:tug7 wrote:I had not realised that Ishares short duration was in US dollars thus incurring extra currency costs.
TP05 is the GBP version of TIP5. See "Listings" towards the bottom of:
https://www.ishares.com/uk/individual/en/products/287202/ishares-tips-0-5-ucits-etf-fund
As far as I know the currency conversion rate for tp05 is the same for all platforms.
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- Lemon Half
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Re: Investing in US TIPS (Treasury Inflation Protected Securities) US
CliffEdge wrote:mc2fool wrote:tug7 wrote:I had not realised that Ishares short duration was in US dollars thus incurring extra currency costs.
TP05 is the GBP version of TIP5. See "Listings" towards the bottom of:
https://www.ishares.com/uk/individual/en/products/287202/ishares-tips-0-5-ucits-etf-fund
As far as I know the currency conversion rate for tp05 is the same for all platforms.
I'm not sure what you mean by that.
TIP5 is quoted in USD. If you have GBP then you have to go through your platform's/broker's FX system and charges to buy it.
TP05 is quoted in GBP, so if you have GBP then you don't have to do any FX conversion to buy it, and of course, as you (and the market makers) are trading in the secondary market there is no currency conversion at all in the trades.
Someone on one of these boards sometime ago did a mini study on GBP vs USD quoted ETFs and showed that there is no FX overhead; the GBP ones traded at the current inter-bank GBP:USD rates to the USD ones. Maybe that's what you mean?
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- Lemon Quarter
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Re: Investing in US TIPS (Treasury Inflation Protected Securities) US
mc2fool wrote:CliffEdge wrote:mc2fool wrote:tug7 wrote:I had not realised that Ishares short duration was in US dollars thus incurring extra currency costs.
TP05 is the GBP version of TIP5. See "Listings" towards the bottom of:
https://www.ishares.com/uk/individual/en/products/287202/ishares-tips-0-5-ucits-etf-fund
As far as I know the currency conversion rate for tp05 is the same for all platforms.
I'm not sure what you mean by that.
TIP5 is quoted in USD. If you have GBP then you have to go through your platform's/broker's FX system and charges to buy it.
TP05 is quoted in GBP, so if you have GBP then you don't have to do any FX conversion to buy it, and of course, as you (and the market makers) are trading in the secondary market there is no currency conversion at all in the trades.
Someone on one of these boards sometime ago did a mini study on GBP vs USD quoted ETFs and showed that there is no FX overhead; the GBP ones traded at the current inter-bank GBP:USD rates to the USD ones. Maybe that's what you mean?
Thanks, wasn't sure that was the case but hoped it was.
Re: Investing in US TIPS (Treasury Inflation Protected Securities) US
Thank you for all the replies. I now believe that I have a better understanding.
I appreciate the different tax treatments of US & UK index linked but at the present return to maturity numbers UK inflation linked are not to my taste.
I appreciate the different tax treatments of US & UK index linked but at the present return to maturity numbers UK inflation linked are not to my taste.
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Re: Investing in US TIPS (Treasury Inflation Protected Securities) US
scrumpyjack wrote:
AFAIAA the indexation of TIPS is only taxable in the UK as a capital gain at the point you dispose of them.
I think the link about this above was a US website for US taxpayers, not UK ones
The indexation of UK gilts is not taxable in the UK
You are correct re UK index linked gilts (tho I wasn't making that point anyway)
I don't think you are correct about corporate and foreign inflation linked bonds. I believe the gain on these which is linked to inflation is taxable as income. The only debt-like securities where gains linked to indexation are taxable as capital are Excluded Index Securities (per HMRC definition). TIPS do not qualify as Excluded Indexed Securities as CPI is not a "chargeable asset" nor it is possible for TIPS to redeem at a 90% loss of their issue price, both a requirement for EIS. (most TIPS have a par floor even in deflation)
I'm not as sure whether this CPI uplift must be tax-accounted for annually or calculated on dsiposal but I believe it to be the former, if you can point to a resource which clears this up that would be great, but I am sure it is under the income regime
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- Lemon Quarter
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Re: Investing in US TIPS (Treasury Inflation Protected Securities) US
eventide wrote:scrumpyjack wrote:
AFAIAA the indexation of TIPS is only taxable in the UK as a capital gain at the point you dispose of them.
I think the link about this above was a US website for US taxpayers, not UK ones
The indexation of UK gilts is not taxable in the UK
You are correct re UK index linked gilts (tho I wasn't making that point anyway)
I don't think you are correct about corporate and foreign inflation linked bonds. I believe the gain on these which is linked to inflation is taxable as income. The only debt-like securities where gains linked to indexation are taxable as capital are Excluded Index Securities (per HMRC definition). TIPS do not qualify as Excluded Indexed Securities as CPI is not a "chargeable asset" nor it is possible for TIPS to redeem at a 90% loss of their issue price, both a requirement for EIS. (most TIPS have a par floor even in deflation)
I'm not as sure whether this CPI uplift must be tax-accounted for annually or calculated on dsiposal but I believe it to be the former, if you can point to a resource which clears this up that would be great, but I am sure it is under the income regime
I don't have any but I would expect that, if the indexation element is taxable as income in the UK, it would be on maturity or sale because interest income in the UK is taxed when received and not on an accruals basis.
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- Lemon Slice
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Re: Investing in US TIPS (Treasury Inflation Protected Securities) US
I have recently purchased UBTL.L this etc holds all US$ Tips with a maturity over 10 years. It's a little more expensive than the iShares products and the spread can be wider.
The official NAV is around $13.20 ( the fund is traded in £, I hold with HL where I get £ distributions and with ii where we get $ distributions) the price is volatile holding long bonds, the NAV has been as high as $17 and as low as $11 in the last 5 years.
We know inflation is far higher now than at any time in the last 5 years, the coupons on these bonds are fairly low.
The distribution in 2019 was 36c, in 2020 12c and in 2021 48c, in 2022 the total is 104c
https://www.ubs.com/uk/en/assetmanagement/funds/etf/lu1459802754-ubs-lux-fund-solutions-bloomberg-tips-10-ucits-etf-usd-a-dis-pd001.html#Distributions
These figures have clearly risen substantially and the yield % is now just under 8%, this is highly suggestive of indexation being paid out, since I am in tax free accounts its not a concern. The figure for the excess reportable income for ITPS (accumulation total TIPs market) is around 1.4% for year ending 31/10/2021 far lower.
I see the long TIPs as interesting as the real yield is around 1% and in the event of high inflation/recession I think it will do well.
The official NAV is around $13.20 ( the fund is traded in £, I hold with HL where I get £ distributions and with ii where we get $ distributions) the price is volatile holding long bonds, the NAV has been as high as $17 and as low as $11 in the last 5 years.
We know inflation is far higher now than at any time in the last 5 years, the coupons on these bonds are fairly low.
The distribution in 2019 was 36c, in 2020 12c and in 2021 48c, in 2022 the total is 104c
https://www.ubs.com/uk/en/assetmanagement/funds/etf/lu1459802754-ubs-lux-fund-solutions-bloomberg-tips-10-ucits-etf-usd-a-dis-pd001.html#Distributions
These figures have clearly risen substantially and the yield % is now just under 8%, this is highly suggestive of indexation being paid out, since I am in tax free accounts its not a concern. The figure for the excess reportable income for ITPS (accumulation total TIPs market) is around 1.4% for year ending 31/10/2021 far lower.
I see the long TIPs as interesting as the real yield is around 1% and in the event of high inflation/recession I think it will do well.
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- Lemon Slice
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Re: Investing in US TIPS (Treasury Inflation Protected Securities) US
CliffEdge wrote:Hedged I believe.
Sorry wasn’t too sure if this referred to my mentioning UBTL, if so it’s not hedged. Underlying is us$ but trades in GBP
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- Lemon Quarter
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Re: Investing in US TIPS (Treasury Inflation Protected Securities) US
Are you sure it's not hedged? The data sheet was confusing.
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Re: Investing in US TIPS (Treasury Inflation Protected Securities) US
Does TP05/TIP5 pay a dividend? Believe me I have tried searching for this information but can't seem to get a handle on this ETF.
Thanks.
Cinelli
Thanks.
Cinelli
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- Lemon Half
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Re: Investing in US TIPS (Treasury Inflation Protected Securities) US
cinelli wrote:Does TP05/TIP5 pay a dividend? Believe me I have tried searching for this information but can't seem to get a handle on this ETF.
Thanks.
Cinelli
Yes. Right under the large font "iShares $ TIPS 0-5 UCITS ETF" is a dropdown list that says "USD (Distributing)". If you scroll down a bit in the left hand column there is "Distributions".
The "USD (Accumulating)" variant seems to be only listed on Euronext and in Mexico.
https://www.ishares.com/uk/individual/en/products/287202/ishares-tips-0-5-ucits-etf
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