The TIPS Trap: How SCHP Can Lose Double Digits When Interest Rates Spike

Inflation has not cooled. CPI reached 330.293 in March 2026, climbing from 320.302 a year earlier, and Core PCE, the Fed’s preferred gauge, sits in the 90.9th percentile of its 12-month range. For investors holding nominal Treasuries, that quietly erodes purchasing power every month. The Schwab U.S. TIPS ETF (NYSEARCA:SCHP | SCHP Price Prediction) exists for exactly this problem.

What SCHP Is Built To Do

SCHP tracks the Bloomberg US Treasury Inflation-Linked Bond Index (Series-L), a broad-maturity basket of Treasury Inflation-Protected Securities. The mechanics matter: TIPS pay a fixed real coupon, but the principal adjusts with CPI. When inflation runs hot, the bond’s face value rises, the coupon is paid on that higher base, and the holder collects an inflation-adjusted return rather than a nominal one.

Against most fixed-income peers, the cost case is hard to argue with. SCHP charges 0.03% in net expenses, which puts effectively the entire real yield in the investor’s pocket. That fee structure is why it shows up repeatedly in Boglehead-style portfolios as the default TIPS sleeve.

The return engine has two parts. First, the real yield, which moves with the 10-year Treasury (almost 4.3%) minus market-implied inflation expectations. Second, the CPI accrual on principal, which is the explicit inflation hedge. Investors buy SCHP for a contractual claim on real purchasing power, not for capital appreciation.

How It Has Actually Performed

The execution has been uneven. SCHP returned 4.82% over the past year and 1.69% year-to-date, with shares near $27. That is reasonable in a year when the Fed cut from 4.5% in September 2025 to 3.75% by December and held there.

Stretch the window and the picture changes. SCHP’s five-year price return is 7.11%, and its 10-year price return is 30.25%. Distributions add to that, but the price chart reflects the duration damage TIPS took during the 2022 rate shock, which most retail holders on Reddit’s r/Bogleheads and r/ETFs threads describe as the lesson that surprised them: a TIPS fund can lose double-digit percentages in a single year if real yields spike, even while inflation is high. The fund hedges inflation; it does not hedge interest rates.

The Tradeoffs Worth Knowing

1. Duration risk dominates short-term returns. SCHP holds the full TIPS curve, so its price is sensitive to changes in real yields. With the 10-year hovering near the upper end of its 12-month range, any further repricing flows directly through net asset value.
2. Tax inefficiency in taxable accounts. The CPI principal adjustment is taxed as ordinary income in the year it accrues, even though the cash is not received until maturity or sale. This is the “phantom income” problem, and it is why most experienced TIPS holders keep SCHP in an IRA or 401(k).
3. Underperformance when inflation surprises lower. If breakevens compress and inflation cools toward the 2% Fed target, nominal Treasuries will outperform TIPS. The hedge has a cost when it is not needed.

The current setup, with the 10Y-2Y spread at 0.57% and VIX near 19, is a working middle ground. It is a working market where inflation protection still has a defensible seat at the table.

SCHP fits best as a 5% to 15% slice of the bond allocation for investors with a real-spending liability, retirees, near-retirees, or anyone funding future expenses in dollars, held inside a tax-advantaged account; the primary risk is that rising real yields can take a bite out of principal before the inflation accrual makes the holder whole.