TIPS' Time May Be Near

Scott Berry, an analyst at Morningstar, says his worry over TIPS is that they lose sight of the main reason for their investments.

"The problem investors could have is that they're looking at TIPS as a defense against interest rates, instead of inflation," he says. "Given that yields are low and interest rates could move higher, I think they should have a more reasonable expectation."

They now have a few more options in terms of meeting those expectations. In December, Barclays Global Investors launched its iShares Lehman TIPS Bond Fund(TIP Quote), an exchange-traded fund that is cheaper than its actively managed competitors, charging 0.2% for its passive management, vs. Pimco's 0.47% annual fee.

Despite its parent company's recent spate of bad publicity, most investment advisers recommended the Pimco Real Return Fund (PRTNX Quote) as their first choice for a TIPS investment. The fund has a range of share classes and has both a retail and institutional clientele. Its Class A shares had a three-year return of 7.06%.

Yaeger, in Medford, says a comparison of the TIPS fund with Pimco's Total Return Bond Fund shows the TIPS fund is less volatile. As market interest rates rose last summer with investors convinced that the Fed's interest rate cutting days were over, shares in the Pimco fund dropped from a June 13 high of $11.66 to an Aug. 1 low of $10.54 -- a 9.6% decline. Shares in the TIPS fund went from $11.99 to $11.11 in the same period for a decline of 7.3%.

"It held up better because there is just more security associated with TIPS," Yaeger said. "Can you imagine how it will behave when inflation does show up? That's going to be a good indicator of how they are going to act when we start this upward interest rate march."

That disparity is a TIPS fund's best selling point, says Vanguard manager Hollyer.