TIPS are bonds issued by the federal government through a bank, broker, or the Treasury, for five, ten and twenty year maturities. Their value grows to the extent of inflation. TIPS also are bought in mutual funds and ETFs.
Investors seek inflation protection more than interest, which is low. With little current inflation, returns are insignificant. Potential inflation makes for their investor attraction.
State and local taxes do not apply on U.S. Treasury obligations. However, additional interest paid because of inflation will be subject to federal taxes.
But why buy them? I have never considered TIPS a valid bond inflation advantage, despite the publicity they receive in the financial media.
Moreover, TIPS have been bid up by public demand, in excess of their true value for that vaunted inflation protection. And you can get inflation protection elsewhere. Even with other bond funds, yielding much higher returns.
You get that protection in diversified low-cost bond funds with shorter duration, that reinvest their income. I constantly refer to duration, which the financial media unfortunately and ignorantly tends to overlook. ( See the Earl J Weinreb NewsHole® comments.)
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