Would a low duration TIPS ETF work as part of the cash segment?

[lazyboy]

Being dissatisfied with the lack of performance on cash segment of the PP, I came upon this article:

http://www.wiserinvestor.com/lower-dura ... rotection/

What I get from this article is that the Pimco 1-5 yr. US Tip Index Fund- ETF= STPZ, which has a low duration= 2.5 years may be an improvement over a short term treasury ETF.
I know PP theorists are critical of TIPS, however, if the the duration is short, the bonds are as reliable as short  treasuries than the question would be would they perform as well or better in an inflationary move? Also keep in mind that they are paying out positive returns right now while short term treasuries are not. 

[TripleB]

No it will not work.

You could take 20% of your cash portion and put it in an individual TIPS of 10 year duration that you buy at auction, hold to maturity, and redeem the dividends into your MMF.

[edsanville]

It mentions in that article that the TIPS fund could lose ~20% of its value if a situation like 1980-1981 happens.  I know that was one of the worst years, if not the worst year for the PP...  so losing 20% in the TIPS ETF might be bound to occur at the exact worst time?

I must admit though, the recent chart of PP performance with VTI, TLT, GLD, and STPZ looks appealing.

[lazyboy]

Thanks  for pointing that out, edansville,

The article doesn't mention whether low duration TIPS, 1-5 year, would have been as affected by the perfect storm of 1980-81 or was it referring to all TIPS, which didn't exist at the time. I admit to some confusion on my part about the relationship between inflation rates and interest rates and how TIPS can be negatively affected:

"In a scenario mentioned by Anne Lester, a senior portfolio manager at JPMorgan Funds in a May 2009 WSJ article, interest rates rose from 10% to 15% while inflation (CPI) fell from 14% to 10% from July 1980 to July 1981.  She refers to this time (TIP Securities did not exist at the time) as the “perfect storm’’ that could cause TIPS to lose 20% in value.

It is important to note that with TIPS indexes, bonds are being rolled in and out as they fit into or become excluded from the indexes target ranges, and many indexes do not just hold bonds until maturity.  Also, it should be noted that the par value of bonds is changed based on the change in inflation.  Like the situation above, in a high inflation environment where inflation moves down, par values of these Treasury Bonds would decrease."

If the low duration bonds are rolling over and out of the index fairly often wouldn't that offer protection on the downside? And I can see the point about only holding  a TIP to maturity. In this current environment of low (cpi) inflation and low interest rates, the 1980-1981 scenario doesn't seem likely. Of course it would mean one more thing to watch out for... so I can understand the reason to have only 1-3 Year treasuries or a treasury MMF.