Any thoughts on WIP ETF?

[ChapInTokyo]

With 4 years of Trump coming up in a little over a month's time, I'm thinking of swapping out my BNDX - Vanguard Total International Bond ETF holding (ER 0.07%, current yield 2.233%) for WIP - SPDR ® FTSE International Government Inflation-Protected Bond ETF (ER 0.50%, current yield 5.678%) to build in more resilience against turmoil in the world's financial markets.

Does anyone have any opinions, either good or bad, on WIP?

[sutebayashi]

What sort of turmoil in the world's financial markets are you thinking of?

I posed your question to ChatGPT now, and feel fine about sticking with my BNDX myself.

[captainspoke]

So basically you're asking whether trump will be inflationary--and inflationary for that chunk of the world covered by WIP? As with my uncle jerry (at the fed), you might base any decision or action on what has happened, not on a prediction/guess about what might happen.

Separately, the sequence of returns for equities the past 10+yrs has been remarkable. The returns for bond funds over the same period has been pretty unremarkable.** So besides wondering if WIP is a good choice or not, I'd place that in the context of a larger question (making another prediction/guess): Is it finally time that any bond fund will be a good choice?

**and you could narrow that comparison to the last few years during which there was a significant spike in inflation. Eg, how did WIP perform during the last 2-3yrs when inflation did jump higher? (its chart shows a downward trend since 1/2021)

Sorry to be the debby downer...

[ChapInTokyo]

So basically you're asking whether trump will be inflationary--and inflationary for that chunk of the world covered by WIP?

….

**and you could narrow that comparison to the last few years during which there was a significant spike in inflation. Eg, how did WIP perform during the last 2-3yrs when inflation did jump higher? (its chart shows a downward trend since 1/2021)

Sorry to be the debby downer...

Food for thought! I do worry that the tariffs under Trump may thrust the world to decouple, and result in higher inflation around the world, including the US.

With regard to the poor performance of WIP since 2021, would it not be true to say that a lot of that could be attributed to the weakening of the euro and GBP to the dollar? This susceptibility to exchange rate fluctuations is one of the reservations I have with BNDX since that ETF is USD hedged, which does not seem to be of much use to a non-US investor.

[ChapInTokyo]

Bing had this to say about the fall in market price of WIP between 2021 and 2024. I guess I should compare the performance with that for other international bond ETFs…

The SPDR FTSE International Government Inflation-Protected Bond ETF (WIP) experienced a decline in market price between 2021 and 2024 despite rising inflation for several reasons:

1. **Interest Rate Increases**: Central banks, including the Federal Reserve, raised interest rates to combat inflation. Higher interest rates generally lead to lower bond prices, including those of inflation-protected bonds¹.

2. **Currency Fluctuations**: As WIP invests in international bonds, currency fluctuations can impact its performance. A stronger U.S. dollar can reduce the value of foreign investments when converted back to dollars¹.

3. **Market Volatility**: Global economic uncertainties and market volatility can affect investor sentiment and lead to fluctuations in ETF prices¹.

4. **Liquidity and Credit Risks**: The ETF's exposure to international markets, including emerging markets, can introduce higher liquidity and credit risks, which can negatively impact its price¹.

These factors combined to create a challenging environment for the WIP ETF, leading to its price decline during that period.

Is there anything specific you'd like to know more about regarding this ETF or its performance?

ソース: Copilot との会話、 09/12/2024
(1) WIP: SPDR® FTSE International Government Inflation .... https://www.ssga.com/us/en/intermediary ... nd-etf-wip.
(2) SPDR FTSE International Government Inflation-Protected .... https://finance.yahoo.com/quote/WIP/.
(3) SPDR FTSE International Government Inflation-Protected .... https://www.marketbeat.com/stocks/NYSEARCA/WIP/.
(4) WIP | SPDR FTSE International Government Inflation .... https://www.wsj.com/market-data/quotes/mutualfund/WIP.
(5) SPDR FTSE Intl Govt Inflation-Protected Bond ETF - Google. https://www.google.com/finance/quote/WIP:NYSEARCA.

[ChapInTokyo]

What sort of turmoil in the world's financial markets are you thinking of?

I posed your question to ChatGPT now, and feel fine about sticking with my BNDX myself.

I think that you and ChatGPT and @captainspoke are right. BNDX does perform substantially better than WIP in all kinds of time periods that we’ve had in the past ten or so years, with dividends reinvested.

I guess I’ll be keeping my BNDX holdings intact!

[TokyoWart]

Inflation-protected bonds still face the risk of declines in value because of an increase in interest rates. When interest rates rose suddenly in the US, the inflation-protected TIPS fell quite a bit. It is easy to confuse two things that are going on for bonds values and the way you want to value a future stream of income:

1. Inflation risk. This is the risk that 10,000 yen I receive in in the future will have less value than 10,000 yen today because prices increase due to inflation. Inflation-protected bonds are good at protecting against this risk.

2. Interest rate risk. This is the risk that a bond I buy today that has a coupon of x% will fall in value if interest rates increase to (x+alpha)%. Everything else being equal, a bond will fall by (alpha x duration)% when this happens. Inflation-protected bonds do not fully protect against this risk.

Inflation protected bonds can be structured in different ways but taking the example of US TIPS there is a fixed rate which does not change and is paid out every 6 months. On top of that the principal value of the bond increases by the rate of inflation and that added principal value continues to generate interest at the fixed rate. That can mean these bonds fall a little less than the (alpha x duration)%. Nonetheless, the fixed rate is important and you don't want to buy these bonds when it is very low. (For TIPS a fixed rate of 2% or more is considered pretty good.)

[ChapInTokyo]

Inflation-protected bonds still face the risk of declines in value because of an increase in interest rates. When interest rates rose suddenly in the US, the inflation-protected TIPS fell quite a bit. It is easy to confuse two things that are going on for bonds values and the way you want to value a future stream of income:

1. Inflation risk. This is the risk that 10,000 yen I receive in in the future will have less value than 10,000 yen today because prices increase due to inflation. Inflation-protected bonds are good at protecting against this risk.

2. Interest rate risk. This is the risk that a bond I buy today that has a coupon of x% will fall in value if interest rates increase to (x+alpha)%. Everything else being equal, a bond will fall by (alpha x duration)% when this happens. Inflation-protected bonds do not fully protect against this risk.

Inflation protected bonds can be structured in different ways but taking the example of US TIPS there is a fixed rate which does not change and is paid out every 6 months. On top of that the principal value of the bond increases by the rate of inflation and that added principal value continues to generate interest at the fixed rate. That can mean these bonds fall a little less than the (alpha x duration)%. Nonetheless, the fixed rate is important and you don't want to buy these bonds when it is very low. (For TIPS a fixed rate of 2% or more is considered pretty good.)

Thanks for this explanation of the inflation risk versus interest rate risk @TokyoWart! With regard to WIP, I first thought that it might have better protection against currency exchange rate risk than BNDX since the holdings are an unhedged basket of the major world currencies excepting USD (since I have USD exposure in a holding of VGIT Vanguard Intermediate Term Treasury ETFs). The fact that it’s all government bonds unlike BNDX also seemed to be an attractive factor too…

Looking at the movement of BNDX and WIP market prices I saw how WIP seemed to more closely mirror the movement of the USD exchange rate over the past few years, mostly by trading lower as the dollar strengthened but also trading higher when the dollar weakened.



But when I looked at the total returns at the ETF Total Return calculator, I found that WIP really did not perform as well as BNDX in pretty much any time period of its since its launch. Ah well!

[ToushiTime]

Inflation-protected bonds still face the risk of declines in value because of an increase in interest rates. When interest rates rose suddenly in the US, the inflation-protected TIPS fell quite a bit. It is easy to confuse two things that are going on for bonds values and the way you want to value a future stream of income:

1. Inflation risk. This is the risk that 10,000 yen I receive in in the future will have less value than 10,000 yen today because prices increase due to inflation. Inflation-protected bonds are good at protecting against this risk.

2. Interest rate risk. This is the risk that a bond I buy today that has a coupon of x% will fall in value if interest rates increase to (x+alpha)%. Everything else being equal, a bond will fall by (alpha x duration)% when this happens. Inflation-protected bonds do not fully protect against this risk.

Inflation protected bonds can be structured in different ways but taking the example of US TIPS there is a fixed rate which does not change and is paid out every 6 months. On top of that the principal value of the bond increases by the rate of inflation and that added principal value continues to generate interest at the fixed rate. That can mean these bonds fall a little less than the (alpha x duration)%. Nonetheless, the fixed rate is important and you don't want to buy these bonds when it is very low. (For TIPS a fixed rate of 2% or more is considered pretty good.)

Thanks for this explanation of the inflation risk versus interest rate risk @TokyoWart! With regard to WIP, I first thought that it might have better protection against currency exchange rate risk than BNDX since the holdings are an unhedged basket of the major world currencies excepting USD (since I have USD exposure in a holding of VGIT Vanguard Intermediate Term Treasury ETFs). The fact that it’s all government bonds unlike BNDX also seemed to be an attractive factor too…

Looking at the movement of BNDX and WIP market prices I saw how WIP seemed to more closely mirror the movement of the USD exchange rate over the past few years, mostly by trading lower as the dollar strengthened but also trading higher when the dollar weakened.

But when I looked at the total returns at the ETF Total Return calculator, I found that WIP really did not perform as well as BNDX in pretty much any time period of its since its launch. Ah well!

In addition to the issues with interest rate increases and the durations of the TIP funds:

I have to keep reminding myself that regular bond funds are discounted for inflation expectations, i.e. they price in expected inflation, and that the the extra cost of hedging against inflation in TIPs funds doesn't really pay off unless there is unexpected inflation.

I guess you just accept the extra cost as a sunk cost like insurance against a house fire, but if it were a shorter duration fund, the new inflation expectations would get priced in before long. The returns will not be great but less time needed to recover from spikes in interest rates when central banks try to contain the inflation.

I might consider a shorter duration developed market government bond fund, but haven't found one. The developed government bond funds seem to be about 7-10year maturities with a duration of about 7-8 years.