Amundi has launched a new ETF in Europe enabling investors to capitalize on rising inflation expectations in the US.
The fund is designed to profit from an increase in inflation expectations.
The Amundi Index Breakeven Inflation USD 10Y UCITS ETF has listed on Euronext Paris in US dollars (BINFU FP) and on Euronext Amsterdam in euros (BINFU NA).
The fund targets the spread between conventional fixed-rate Treasury bond yields and those of inflation-linked bonds, thus offering a play on inflation expectations without exposing the investor to changing interest rates.
It is linked to the Markit iBoxx USD Breakeven 10-Year Inflation (Futures) Index which consists of long positions in the eight US Treasury Inflation-Protected Securities (TIPS) with remaining maturities closest to ten years, and a short position in the Ultra 10-Year Treasury Note futures contract.
Eligible TIPS for the long position must have at least $5 billion outstanding. They are weighted by market capitalization subject to a cap of 30%.
The number of Ultra 10-Year Treasury Note futures contracts sold in the short position is set in order to have an index modified duration closest to zero.
An increase in inflation expectations will lead to an appreciation of the index’s value as increasing inflation expectations cause the yields on non-inflation protected bonds to rise and their prices to fall, thus increasing the value of the short position in the portfolio.
The strategy is different from a long-only position in TIPS which provides a hedge against inflation but may experience losses if rising inflation expectations were to translate into higher interest rates.
The fund comes with an expense ratio of 0.16% which is notably cheaper than its only direct competitor – the Lyxor USD 10Y Inflation Breakeven UCITS ETF (INFU LN) – which costs 0.25%.
The Lyxor ETF tracks the Markit iBoxx USD Breakeven 10-Year Inflation Index which differs from the Amundi product’s underlying in that it uses actual bonds rather than futures to execute the short position. The fund has accumulated $220 million in assets under management since its launch in June 2016.