Vanguard Bets On Inflation-Indexed Bond

Faced with little demand for conventional bond funds, some fund companies are looking for other ways to attract investors.

Vanguard Group, for example, is launching its first inflation-protected securities fund, giving bond investors a way to shield returns from cost-of-living increases.

The fund will invest primarily in inflation-indexed bonds issued by the U.S. government and its agencies as well private-sector corporations, according to John Hollyer, who will co-manage the fund with fellow Vanguard principal Kenneth Volpert.

Unlike conventional bonds, inflation-indexed securities’ principal values are adjusted to reflect inflation along the way.

Vanguard must smell a winner: Pimco Real Return Bond Fund, the oldest and biggest TIPS fund, has seen assets increase almost tenfold in the last year, rising to $330 million from $35 million in May 1999, as investors have grown more nervous about inflation in the economy.

But analysts note that because of their quirky tax structure, inflation-protected bonds are most appropriate for tax-sheltered accounts.