A proposed regulatory exemption could allow Vanguard's Inflation-Protected Securities Fund (VIPSX) to issue a class of ETF shares. The new fund would represent Vanguard's first actively managed ETF, as well as competition for the highly popular iShares TIPS ETF (TIP).While economic data has yet to prove that inflation should be a major concern for investors, net flows into inflation-protection funds suggest that the fear is real. Assets in VIPSX have ballooned from $17 billion at the end of 2008 to $27.5 billion today. Assets in TIP have increased from $7.6 billion in October of 2008 to $17.2 billion at the end of October 2009, according to recent data from the National Stock Exchange. (See the October ETF Scorecard). Assets in SPDR Gold Shares ( GLD), used by many investors to hedge against the threat of inflation, grew from $17.6 billion in October 2008 to $36.9 billion at the end of October 2009. (Read How to Invest in Gold ETFs) While gold ETF funds and TIPS ETFs from iShares and Pimco (See Pimco TIPS the Competition) have captivated the attention of investors worried about inflation, the new ETF from Vanguard could provide some serious competition. ETF shares of VIPSX were first proposed in 2007, but later rejected when Vanguard proposed to reveal only a portion of the funds' holdings. Now, promises of full transparency could help to push these ETF shares through the regulatory hoops. Like TIP and the existing Vanguard Inflation-Protection mutual fund, the new ETF shares would invest primarily in Treasury Inflation-Protected Securities. VIPSX, as well as the proposed ETF, would track the Barclays Capital U.S. Treasury Inflation Protected Securities Index. This fund will differ from passively managed ETFs, however, in that the average maturity and mix of bonds may differ from those in the underlying index.
In an interview with The Wall Street Journal, Ken Volpert, senior portfolio manager and head of the taxable bond group at Vanguard, noted that, "we're trying to do a lot of little things that add value...we have a huge tailwind expense-ratio advantage, so we start the year with a big advantage, and if we can then add a bit of incremental value by doing a lot of different strategies, it makes the fund very compelling." Vanguard anticipates that the new ETF shares will be popular with financial intermediaries, like registered investment advisors and financial planners, who generally don't recommend mutual funds for clients, if they are not compensated by the fund companies. The structure of ETFs skirts this issue. Low interest rates, a weak dollar ( The Dollar's Problem) and speculation about the quantity of stimulus funds continue to make investors wary about the risks of inflation. Will the new actively managed Vanguard ETF effectively address these concerns? While actively managed ETFs have been highly anticipated and lauded as the next step in innovative fund products, many of these actively managed funds have failed to gain traction among consumers. Often, actively managed funds levy higher expense ratios and can be unpredictable in their long-term goals. ETFs have been traditionally used to target specific sectors and objectives. If anyone can be successful in this space, however, Vanguard may have the best chance. Vanguard has already successfully permitted the conversion of open-end mutual funds into ETF shares, and the fund company has had success in offering lower-cost alternatives to entrenched ETFs. The true test of an ETF's viability is its performance in open-market trading. While the new ETF issue of VIPSX could present a challenge to bullion funds like SPDR Gold Shares ( GLD) and iShares Comex Gold ( IAU), as well as competition for TIP, the proof will be in investor interest. If Vanguard is given the exemption, and a new inflation-protection ETF hits the market, it is best to watch and wait before scooping up shares. A special note from Don: To put it simply, I want to help you profit from ETFs. You don't have to be an expert trader -- there are potential profits for investors at every level. And I think there's no better way to jump into the world of ETFs than my brand new service, TheStreet ETF Action by Don Dion. Membership is limited, so click here to get in on the action!