Leading European exchange-traded fund provider Lyxor has launched two new ETFs providing investors with exposure to rising inflation expectations.
Francois Millet, Head of ETF and Index Product Development at Lyxor.
The Lyxor USD 10Y Inflation Breakeven UCITS ETF (INFU) and Lyxor EUR 2-10Y Inflation Breakeven UCITS ETF (INFL) target the spreads between traditional bond yields and those of inflation-linked bonds, thus offering a pure play on inflation expectations without exposing the investor to changing interest rates.
The Lyxor USD 10Y Inflation Breakeven UCITS ETF tracks the performance of the Markit iBoxx USD Breakeven 10-Year Inflation Index, which is representative of the performance of a long position in the six last issuances of US 10-year Treasury Inflation-Protected Securities (TIPS) and a short position in US Treasury bonds with matching durations.
The Lyxor EUR 2-10Y Inflation Breakeven UCITS ETF tracks the performance of the Markit iBoxx EUR Breakeven Euro-Inflation France & Germany Index which is representative of a long position in inflation-linked bonds issued by France and Germany and a short position in France and Germany sovereign bonds with matching durations.
An increase in inflation expectations will translate to an increase in the value of each ETF 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.
This methodology is different to a long-only position in Treasury Inflation Protected Securities, which provide a hedge against inflation, but which, like any bond, are likely to fall in value if rising inflation expectations were to translate into higher interest rates.
The ETFs may be well suited as a simple overlay to an existing bond portfolio that requires a better inflation hedge than TIPS may be able to provide.
Both ETFs have a Total Expense Ratio of 0.25%.
Francois Millet, Head of ETF and Index Product Development at Lyxor, said: “Lyxor’s Breakeven UCITS ETFs gives investors exposure to the breakeven rate of inflation with the benefit of transparency and liquidity, thus turning it into a proper and investable asset class”.
The US-listed ProShares 30 Year TIPS/TSY Spread ETF (NYSE: RINF) and the ProShares Short 30 Year TIPS/TSY Spread ETF (NYSE: FINF), were the first such ETFs to provide exposure to so-called breakeven inflation, a widely followed measure of inflation expectations.
The two ETFs are linked to the Dow Jones Credit Suisse 30-Year Inflation Breakeven Index, which tracks the returns of a long position in 30-year TIPS and a short position in Treasury bonds. The long ETF (RINF) seeks to match the performance of the Dow Jones Credit Suisse 30-Year Inflation Breakeven Index, before fees, while the short ETF (FINF) provides the inverse.
Each ETF has a total expense ratio of 0.75%.