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Author: foobar73 Big red star, 1000 posts Feste Award Nominee! Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35400  
Subject: Re: I-bonds in an IRA Date: 8/30/2003 10:29 PM
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I thought a fund would be less fuss and bother, and Vanguard's expenses are only 0.22%. What are the pros and cons? (Again, this would be in an IRA.)

The fund will likely be cheaper for small investments (under, say, $5,000 or $10,000 or so). This depends a lot on what your broker will charge you to buy actual TIPS. Keep in mind brokerage costs are often "hidden" in the price: you might not pay an actual commission, but the brokerage will raise the price so that they make a profit on the transaction. But also keep in mind that if you'll be holding for a long time, you would pay a fund year after year, whereas any brokerage charges for buying actual TIPS will be done only once.

TIPS only trade in increments of $1000, but funds can be bought in any amount (subject to the fund company's rules, of course), making funds even more attractive for small investors, especially those still saving and investing new money on a regular basis.

Unless you can somehow find stripped TIPS, you will receive your interest payments as cash, should you choose the actual bonds. It will then be up to you to figure out how to reinvest those interest payments. Normally you will not be able to reinvest them in TIPS, since you'll need at least $1000 just to buy one TIPS. On the other hand, the fund will allow you to reinvest interest automatically.

Holding actual TIPS will ensure you do not take a loss, if you can hold on to them to maturity. This means that you know with certainty what you will get at a particular point in the future. With a fund, you will have no idea what you will get for your shares at any point in the future.

In a nutshell, the fund primarily offers convenience, and whether the convenience is worth the price of the annual expenses is somewhat dependent on your personal financial situation.
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