Posted by Davy Bui on August 14th, 2009 in Worth Reading (links to articles, etc.)
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Well, TIPS ETFS, that is. Today’s Wall Street Journal carries an intriguing article spotlighting PIMCO’s objection to TIPS index funds. TIPS, of course, are Treasury inflation-protected securities, designed to protect bond investors against inflation.

The heart of PIMCO’s argument is common to other types of index funds, mainly that savvy traders can front-run them, causing these funds to pay higher prices for their targeted securities. For instance, when S&P announces a change in the S&P 500, the stock to be added will see a run-up in its share price more often than not as traders anticipate extra demand for the stock. Front-running was also a problem with some commodities funds, which have the problem of needing to roll over futures contracts, thus presenting a fat target for traders.

In the case of TIPS, PIMCO finds an unusual supporter in the Vanguard Group, who offers only an active TIPS fund, not an index. The Vanguard Group, under John Bogle, launched the indexing revolution so TIPS investors would do well to heed their warning.