Analyse: iShares Barclays Global Inflation-Linked Bond

This ETF is a USD-denominated financial product whose performance may be affected by foreign exchange fluctuations. This ETF does not distribute dividends.

Fundamentale Analyse

The global economic recovery is proving fairly uneven with emerging economies generally outperforming their developed counterparts. This dichotomy in growth patterns is shaping inflationary pressures globally, with high levels of spare capacity in the developed economies effectively allowing them to keep domestic inflationary pressures at bay. This overall benign inflationary environment in the developed world has also been aided by either stabilisation or decline in key commodity prices – bar raw agricultural produce – throughout 2012. This has helped neutralise imported price pressures.

The general consensus is that the inflationary outlook for the world’s developed economies is for a protracted period of subdued domestic-led price pressures. For a start, most developed economies continue to suffer from a considerable degree of slack. Bar some exceptions, unemployment at above-average levels plus the need for most governments to redress their budgetary situation are seen as two key elements that should keep domestic price pressures under control. And so, the crux of the inflationary matter for the bulk of developed economies at this juncture seems to lie primarily on the evolution of international commodity prices and the pass-through from emerging markets.

The supply-demand imbalances that pushed most international commodity prices higher in the early stages of 2011 did subside in 2012 as the global economic recovery slowed. Forecasts from international bodies such as the IMF show international commodity prices down in 2013-2014; median inflation rates for developed economies around the 1.5-2.0% area in the medium-to-long term (e.g. out to 2017), with those for emerging market economies broadly stable in a 4.5-6.0% range. It is also important to underline that inflation expectations in most developed economies (e.g. US and Eurozone) remain at levels consistent with monetary policy targets notwithstanding the exceptionally accommodative policy settings in place. The absence of wage-led pressures – no doubt a by-product of still challenging labour market conditions – is proving a key element in neutralising inflationary risks.

Indexkonstruktion

The Barclays Capital World Government Inflation-Linked Bond Index measures the aggregate performance of the major government inflation-linked bond markets. Issuing countries eligible for inclusion in the index must comply with a set of criteria with regards to local long-term currency ratings from either S&P or Moody’s (e.g. minimum A3/A- for G7 and Eurozone and Aa3/AA- for others) as well as market size (e.g. minimum aggregate issuance within a currency area is USD 4bn). As of writing, eligible countries were Australia, Canada, France, Germany, Japan, Sweden, UK and the US. Issuing countries are statistically weighted by market capitalisation. The minimum outstanding for individual bonds from eligible sovereigns is set in local currency terms and reviewed annually by Barclays Capital. Bonds must have a minimum remaining maturity of one year, be issued in local currency and linked to a commonly used domestic inflation index, with the exception of Eurozone issuers, where Eurozone-wide inflation indices are also acceptable. The index is calculated daily on a total return basis using mid-market real prices provided by relevant market-makers in each local market ahead of market close. All spot and forward FX rates used are official mid 16:00 London. The index is rebalanced on the last calendar day of each month. Coupon income received during the month is held in a deposit at 1M Libor (or equivalent) -15bps and reinvested in the index at rebalancing.

Fondskonstruktion

This ETF was launched in August 2008 and is domiciled in Ireland. iShares uses physical replication to track the performance of the Barclays Capital World Government Inflation-Linked Bond Index. The ETF prospectus describes the replication methodology as “statistical sampling” rather than “full replication”. The comparative analysis of the basket of constituents of fund and index has routinely revealed only a small difference in the total number of bonds. More so, they tend to be primarily circumscribed to a single issuer, namely Japan. Despite this difference in the number of constituents, we have found that the fund broadly replicates aggregated statistical weights both by issuing country and maturity segment. At the time of this writing (e.g. early February 2013) US government inflation-linked bonds accounted for 45.5% of the fund’s constituents, followed by the UK with close to 29% and the Eurozone (e.g. France and Germany) with just over 16%. The remaining was distributed amongst the rest of issuing countries. As per maturity segment, we found a rough 40/60 split between short/medium and long-dated issues. This ETF does not distribute dividends. Income and other profits are accumulated and reinvested on behalf of shareholders. iShares may engage in securities lending in order to optimise the ETF’s tracking performance. BlackRock acts as investment manager on behalf of iShares. The amount of securities that can be lent out is capped to 50% per fund. Lending operations are hedged by taking UCITS-approved collateral greater than the loan value and by revaluing loans and collateral on a daily basis. The collateral is held in a ringfenced account by a third party custodian. The degree of overcollateralisation is a function of the assets provided as collateral, but typically ranges from 102.5% to 112%. Lending revenue is split 60/40 between the ETF and BlackRock, respectively.

Gebühren

The total annual expense ratio (TER) is 0.25%. This seems to be the average for European-domiciled ETFs offering exposure to the global government inflation-linked bond market. Additional costs potentially borne by investors and not included in the TER include bid/offer spreads and brokerage fees when buy/sell orders are placed for ETF shares.

Alternativen

This iShares ETF came to the marketplace broadly one year after the db x-trackers iBoxx Global Inflation-Linked TR Index Hedged ETF, which was the first ETF in the European ETF market to offer investors exposure to the performance of the global government inflation-linked bond market. According to our database, as of this writing these remain the only two ETFs in Europe offering this particular market exposure.

Carrying a TER of 0.25%, the swap-based db x-trackers ETF retains top spot in market share terms as measured by assets under management (e.g. roughly 65% to 35% for iShares). The db x-trackers ETF tracks the performance of an iBoxx total return index encompassing inflation-linked bonds issued by both sovereigns and quasi-sovereigns (e.g. local/regional governments or public sector entities ultimately backed by the sovereign issuer). In practical terms, this does not translate into major differences vs. iShares as quasi-sovereigns represent less than 10% of the bond universe. However, the iBoxx index tracked by the db x-trackers ETF has a less restricted rating criteria for eligible bonds, and as of this writing it continues to include inflation-linked bonds issued by Italy. Another key difference is that the db x-trackers ETF is hedged in EUR, which might be a useful feature for Eurozone investors unwilling / unable to deal with foreign exchange considerations.