By David Enna, Tipswatch.com
Morningstar.com published an article last week singling out three of its favorite ETFs as having “a lousy 2025.” I was surprised to see Vanguard’s Short-term Inflation-Protected Securities ETF (VTIP) listed as one of the three.
The three ETFs were:
- iShares MSCI USA Quality Factor ETF (QUAL)
- Avantis US Small Cap Value ETF (AVUV)
- Vanguard Short-Term Inflation-Protected Securities ETF (VTIP)
I don’t know anything about the first two ETFs, except that they make bets in the equities market. QUAL (expense ratio of 0.15%) aims for large-cap winners, with top three holdings of Apple, Microsoft and Nvidia. AVUV (expense ratio 0.25%) is a play on small-cap value, with top holdings of Macy’s, Five Below and Air Lease Corp.
VTIP (expense ratio of 0.03%) is an entirely different kind of investment, very low risk with only 10 holdings, concentrated on TIPS of maturities up to five years. Its effective duration is 2.5 years, much lower than full-spectrum TIPS ETFs like TIP (6.5 years) and SCHP (6.6 years).
Vanguard describes the fund this way:
Designed to generate returns more closely correlated with realized inflation over the near term, and to offer investors the potential for less volatility of returns relative to a longer-duration TIPS fund.
Given its shorter duration, the fund can be expected to have less real interest rate risk, but also lower total returns relative to a longer-duration TIPS fund.
The key point is that VTIP is a low-volatility fund with near-zero credit risk and lower interest-rate risk. By design, it will perform “better than average” during a bond-market downturn, and “worse than average” when bonds are booming. Overall, as Vanguard notes, it should come close to tracking trends in U.S. inflation.
I have invested in VTIP in the past, but no longer have any holdings in this ETF or any other TIPS ETF.
Was 2025 a lousy year for VTIP?
No, it was not, and this is the reason I was surprised by the Morningstar article. Year to date, VTIP has had a total return of 6.08%, its highest return in a decade. That’s well above the U.S. inflation rate of 3.1%. Mission accomplished.
Here is a chart comparing VTIP’s performance versus well-known bond ETFs over the last five years:
It is worth noting that none of these ETFs produced a return exceeding the average rate of U.S. inflation over the last 5 years, at 4.6%. In VTIP’s case, the under-performance reflects the fact that the 5-year real yield increased from -1.20% in October 2020 to 1.38% today, a phenomenal 258 basis points. That created a drag on performance, even for this low-volatility fund, which still returned 3.68% on average over that period.
But let’s look at 2025. It’s true that VTIP’s 2025 return of 6.08% slightly lags the other bond funds with longer durations, which have benefited from falling interest rates. But VTIP does that with a much less risky portfolio, as shown in returns for 2022, a disastrous year for the bond market.
From the Morningstar article:
The ETF’s low level of credit and duration risk was not rewarded during recent markets. Yield had been trending down for most of 2025, and credit spreads plunged after the initial bust in the first quarter, favoring riskier bonds over the ETF’s high-quality, low-duration portfolio.
And then it adds:
But this ETF has and should continue to offer protection when it matters, during stress markets. … Thanks to its downside protection in major market shocks, the ETF beat its category average since its 2012 inception through October 2025, with lower volatility and better risk-adjusted return.
Thoughts
Any investor in VTIP should be quite happy with its 6.08% return year to date. This is a low-risk, low-volatility fund that is designed to closely track trends in U.S. inflation. It is not making bets in the bond market, like you would see in a more-risky high-yield corporate fund. It has had only one year (2022) of negative total returns over the last decade.
VTIP has a stellar expense ratio of 0.03% and a long history of good performance. I like this fund and it is the one I recommend for investors looking for a simpler way to invest in TIPS.
VTIP isn’t designed to “out-perform.” It is designed to “perform,” and it has performed well so far in 2025.
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David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. I Bonds and TIPS are not “get rich” investments; they are best used for capital preservation and inflation protection. They can be purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.
