TIP tracks the ICE US Treasury Inflation-Linked Bond Index and holds US Treasury Inflation-Protected Securities (TIPS), whose principal is adjusted with changes in the Consumer Price Index. When inflation rises, the principal and the interest payments rise with it; if prices fall, the principal adjusts down, but at maturity it is not repaid below its original par value. TIPS tend to outperform nominal Treasuries when inflation is higher than markets expected and to lag when it is lower. The fund has meaningful duration, so rising real yields can lower its price even when inflation is high. The difference between TIPS and nominal Treasury yields, known as the breakeven rate, is a common measure of market inflation expectations.
