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question about TIPS via ETFs

Hoping someone can help me understand this...

Accidentally came across an article in Fortune magazine

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states that: "A major advantage of buying an ETF over an individual bond: If you're holding the ETF in a regular taxable brokerage account, any inflation adjustments will get distributed to you as income. That way you'll at least have the cash on hand to pay the bill when the IRS comes knocking each year."

How does the ETF manage to pay you cash for the inflation adjustments? Or did the author make an error in that the ETF will report it as a distribution, but not really send you any money (because it gets reflected in the price per share)?

Thanks.

Reply to
anoop
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I'd suggest checking the prospectus for the specific ETF (or mutual fund

- there are also open-ended mutual funds that own these bonds). When I looked into one some time ago, the fund's policy was to make distributions based not just on interest collected from bonds it held but also on the inflation adjustments. The fund could sell holdings to raise the cash if necessary. That might then trigger a capital gains distribution, though the amount is likely to be small. Maturing bonds are also a source of cash.

-Tad

Reply to
Tad Borek

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