I have been wrong about all my theories with TIPS and the US dollar (The Markets are saying, create new dollars and the dollar gains strength.) (The Markets are saying newly created dollars will lower inflation.) This is proof as I thought the opposite and the losses in my brokerage account can prove it. I have a new theory... Bad for America, good for the dollar. Good for America, bad for the dollar. Good luck dude!
I look at it now like a zero coupon, low yield bond. Market is saying that there will be deflation over the next few years, yield on this thing will run in the 0-2% range over that time, principal comes in @ 100. Its a safe place to park with limited downside risk at the NAV level. However, it could go down as an ETF below NAV.
This is not an investment vehicle, its a hedge against long term inflation and credit risk. You have AAA bonds that are now selling for 90-95 which were around par 60 days ago, which is indicative of the credit concerns for all debt that is not U.S. backed.
I still see these levels as buying opportunity, but its anybody's guess how it trades in next few days, weeks, months. If inflation does perk up due to all the money printing, then this thing gets to 105 pretty quick. Don't see that happening soon.
NAV is based on what their holdings would currently sell for. Demand for TIPS has collapsed, so actual TIPS (not the ETF) are selling at a significant discount. NAV can drop below the hold-to-maturity value of the underlying TIPS.
If the ETF trades for a value significantly different than NAV, authorized participants (basically larger financial institutions) can create or redeem shares at NAV. This arbitrage acts as both a mechanism to create more shares if demand for the ETF is high, but also forces liquidation of shares if demand for the ETF is low. This arbitrage opportunity generally keeps the price of TIP near the actual NAV.
So how low can this go? Well, there is no actual lower limit. If existing TIPS begin to trade for $0.20 on the dollar, then the NAV of TIP will be $20. This is a highly unlikely scenario, but deflation concerns and/or US government default concerns could continue to push the NAV of this ETF down.
Note that this is different than if you actually purchased the TIPS directly from the US Government. In that case, unless the government defaults, you are guaranteed 100% of your principle at maturity. Of course if you sell before maturity you get whatever the market price is (which could be higher or lower than par value). The TIP ETF trades near current market price all the time.
comadi < So, new buyers of TIPS are putting their money in new TIPS (which cannot lose any principal), rather than buying old notes (as the ones held in the ETF) which will slowly adjust their value downwards to the original $100, should deflation hit hard. >
walkerjks < If the ETF trades for a value significantly different than NAV, authorized participants (basically larger financial institutions) can create or redeem shares at NAV. This arbitrage acts as both a mechanism to create more shares if demand for the ETF is high, but also forces liquidation of shares if demand for the ETF is low. This arbitrage opportunity generally keeps the price of TIP near the actual NAV. >