Index Linked Gilt ETF

ispookie666

I'm trying to get my head around why the iShares Index Linked Gilt ETF (INXG) has dropped so much in value, has a dividend yield of 0..

Rather than buying Index Linked gilts, I thought buying an ETF would be better. 

masonic

An Index Linked Gilt index tracker will hold long duration linkers that have considerable interest rate sensitivity, just like conventional gilts, so they would be expected to fall in the same way. The index linking will do little to soften the blow when interest rates have risen so steeply. The 12 month trailing yield is showing as 0%, but the average coupon is 0.55% and the YTM is 4.8%.

GeoffTF

Here is a relevant article:

https://monevator.com/why-uk-inflation-linked-funds-may-not-protect-you-against-inflation/

If you want to know about the yield, you will need to look at the fund's past distributions. The Excess Reportable Income is also relevant if you are outside a tax shelter.

Linton

Say the expected long term inflation rate is constant at 2.5%. If the interest rate on a fixed bond was 2% then inflation linked bonds would be more desirable and command a higher price. When interest rates rise to 4.5% in a year the market for inflation linked bonds is much smaller and so prices collapse. Index linked bonds are mainly  a long term investment and so changes in market interest rates have a major effect on prices.

Because of their price volatility inflation linked bond index funds do not give great protection against inflation. If you want inflation protection you would be better advised to buy a single IL bond that matures when you plan to sell.

ispookie666

Thanks all, it makes more sense now. 

JohnWinder

Because of their price volatility inflation linked bond index funds do not give great protection against inflation.

OK. So, better, worse or the same protection against inflation as nominal bond index funds? And just briefly, why.

ispookie666

Does that mean, if we are speculating that the inflation will come down, the ETF currently is undervalued? Maybe I'll take a gamble with my gambling part of the portfolio and see. Worst case scenario, 100% write off ☺️

Linton

JohnWinder said:

Because of their price volatility inflation linked bond index funds do not give great protection against inflation.

OK. So, better, worse or the same protection against inflation as nominal bond index funds? And just briefly, why.

Because when you sell a large number of the underlying holdings will be far from maturity and therefore your return could differ significantly significantly from inflation.  The whole point of buying an inflation linked bond is surely to protect your money against inflation.

The pain of failing to do that is worse than the pleasure from exceeding inflation.  If the aim was to exceed inflation it would be somewhat perverse to buy an inflation linked bond, you would surely buy equities.

If do you want to match inflation you need to hold your inflation linked bond to maturity.

Linton

ispookie666 said:

Does that mean, if we are speculating that the inflation will come down, the ETF currently is undervalued? Maybe I'll take a gamble with my gambling part of the portfolio and see. Worst case scenario, 100% write off ☺️

No - as I understand things, inflation linked bonds that are far from maturity are priced on the expectations of long term inflation. They remain pretty constant around say 2-3%.  One or two years of high inflation are not going to make much difference over say 10-20 years.

coyrls

As index linked gilts are trading below par currently because of high interest rates, buying an individual index linked gilt and holding to maturtiy will guarantee a return in excess of RPI.

Linton

coyrls said:

As index linked gilts are trading below par currently because of high interest rates, buying an individual index linked gilt and holding to maturity will guarantee a return in excess of RPI.

True, so now would be a much better time to buy IL bonds than for many previous years if they meet your investment needs.

Interest rates could go higher at some point in the future so if you dont hold to maturity  you could still fail to match inflation.