Your analysis, as usual is excellent. I have recently bought and entry position in WIW as I thought the pros way outweighed the cons. I was aware of much of the information in your post, but your comments helped put a lot in context.

Most interesting to me is the fairly stable NAV of this fund since inception as well as a relatively stable distribution rate. All in all, I think that WIW is an excellent holding for somewhat low risk in a extremely low interest rate environment. I am curious as to your opinion on this fund.

Sid

It looks like there's a little confusion as to the actual "yield" of VIPSX.

Morningstar shows the trailing 12-month yield as 5.64%. Yahoo shows the yield as 5.52% as of 03/31/08. Both of those figures include the variable inflation adjustment.

The 0.94% yield figure comes from the Vanguard web site, with the following information:

"The yield quoted is the real yield, or the yield before adjusting for inflation. The actual yield on the Vanguard Inflation Protected Securities Fund will be a combination of the real yield and an inflation adjustment. A complete estimate of the fund's yield requires that an estimate of future inflation be added to the real yield. Because inflation fluctuates, it cannot be projected into the future precisely enough to be included in the yield quote. The inflation adjustment is based on changes to the Consumer Price Index and can either be positive or negative, based on the change to the CPI. Investors interested in maintaining the purchasing power of their investment should reinvest their dividend distributions."

Looking at VIPSX Historical Dividends we see that the quarterly payouts are all over the map. It looks as though Vanguard makes the inflation adjustments in June and December, since in those quarters the dividend is so much higher than in March and September.

Sid - to answer your question, I don't own WIW but I think it's a good holding for the reasons you mentioned. Reasonable NAV stability and dividend (one decrease and one increase since inception). I'd also throw in good sized asset base and good trading volume for a CEF, giving it better liquidity than most. 

The revised investment parameters, giving the fund wider latitude in their percentage of category holdings, might actually increase risk a little. However, that remains to be seen.

Finally, shareholder activist George Karpus has been reducing his stake in WIW over the past year, but still has a large position with 3.99% of outstanding shares as of his last SEC filing. He once owned 6.5%. Since he is no longer a 5% holder he probably is not required to file 13Ds anymore. Karpus was against the new investment mandate, and here's a cut/paste from letter he wrote to the Trustees about a year ago:

"Why is the Board making such dramatic changes to the Fund's investment policy? The weak explanation given in the Fund's press release is to "allow for more opportunities to further enhance shareholder value." It seems a stretch that allowing the portfolio manager to invest in areas of the bond market that he does not find attractive would enhance shareholder value. Perhaps the true reason for the proposed changes is to differentiate WIW from its sister fund the Western Asset/Claymore U.S. Treasury Inflation Protected Securities Fund (WIA). That way the Trustees can continue to receive two directors fees, auditors can continue to receive two audit fees, the attorneys can continue to receive two attorney fees, and the New York Stock Exchange can receive two listing fees; all at the expense of shareholders - some of which overlap both funds (which increases transfer agent costs).

What would enhance shareholder value? Merging these two funds together is a very common sense thing that could be done in order to reduce fund expenses and enhance shareholder value. Another thing the Trustees may have considered is the sunroof provision outlined in the Fund's original prospectus. This provision spells out remedies (such as tender offers, buybacks, and open-ending) that the Trustees would consider to narrow the Fund's discount. These are changes upon which the Trustees should have been focused, after all they do not manage the Fund's assets, they are stewards of the Fund's owners - the shareholders."

Best,

Steve 

Thanks for the clarification / info.  I guess Vanguard gets kudos for disclosure, but I bet their marketing people would like to slit their wrists -- not a lot of folks make it through the first line of explanatory text.

Regards, Dick

Thanks to all for their comments.  While walking, I came to same conclusion regarding the principal adjustment and had started a post on the reconciliation, but noticed the post by Steve (Schreinstein) and pulled mine.  I still feel that the WIW is the better investment even after Vanguard's principal adjustment and will keep holding it, although I haven't done the due diligence to back it up the conclusion.

 Dick, I think it was you in an earlier post that alerted me to WIW.

Thanks

 Jos

Interesting discussion; thanks for the details. Before reading this I had done my own research into WIW vs. VIPSX.  When I was able to find comparable statistics (not a simple process), I found WIW ahead on yields only 3.2. to 3.1% YTD: 6.07% to 5.64% TTM; and behind 10.6 to 11.6 for 2007.  And WIW has a larger expense ratio, .75 to .20.

That's pretty much a wash, so I'm leaning toward VIPSX as less risky.

My question now is, when to start investing in TIPS? The returns are quite low now-- I don't even know where to find the nominal return rates among all the bond price tables. 

Any advice on that?

aalan 

As I wrote previously, for whatever it's worth, Bill Gates, through his investment vehicle Cascade Investments owns shares in both WIW and its fraternal twin WIA, but does not, apparently, own shares in VIPSX.

Something else I find interesting is that there is a new ETF that invests in not only American inflation-protected bonds, but foreign ones as well. It's the SPDR DB International Government Inflation Protected Bond fund, ticker WIP. The fund's largest position is in inflation-protected, euro-denominated French OATS, but other top holdings include UK, Canadian and Brazilian inflation-protected bonds. Credit quality is AA-.

Any comments on this one? 

Jagor

It may not include US inflation protected bonds. Haven't seen the complete list of holdings, but there appear to be none in the top 25.

"The investment objective of the Fund is to provide investment results before fees and expenses correspond generally to the price and yield performance of the DB Global Government ex US Inflation Linked Bond Capped index. The Index measures the performance of the inflation linked government bond markets of developed and emerging market countries outside of the United States. Inflation protected public obligations of the Index commonly known in the United States as Treasury Inflation Protected Securities, are securities issued by such governments that are designed to provide inflation protection to investors."    -etfconnect

The whole purpose of WIP is not to hold any U.S.-dollar denominated TIP's.  It is a multiple hedge against a falling dollar, through potential foreign currency appreciation, the semi-annual adjustment of the principal according to the inflation rate of the base currencies, and the interest payments from the bonds themselves.  Of course, in the case of a rising dollar, WIP is less interesting.

Jagor 

Hello Jagor,

I think this ETF as you said could be a good hedge against the dollar.

I like that it is diversified.

One thing to be aware of, is that 10.25% of the bonds

are below Baa, and its history is only three month.

Thomas