Inflation Linked Funds

Inflation Linked Funds

If you want to buy bonds that have built-in inflation protection, you have some options that I have directly by the individual bonds or you can buy a pool of wrapped bonds within a fund each of the two methods has its disadvantages and benefits so here we look for some of these practical aspects in detail, keep in mind that all these examples are only illustrative if you want investment advice and consult your independent financial advisor in our inflation video we look to see which asset classes provide some degree of protection against increase in inflation ties not because their income is fixed inflation is the deadly enemy of gold bonds simply was not reliable their historical returns just are not linked to inflation stocks provide a little protection but once inflation reaches about percent of all this protection disappears the only asset class where there is a reliable link between your returns and inflation is inflation-linked securities I use an app called share sc ope to look at stock prices and bond prices I did a simple search for indexed securities Treasuries here is one list 28 of them if you want to look for these on your broker's website, you can use these codes on the left that I have highlighted at Road 14 and the identification exists trt qo bond was born or was issued in 2011 and dies or matures in 2034 and the price is about one hundred and forty-eight pounds so I went to my broker's website in this case Barclays I look up TR TQ and the purchase price is one hundred and forty nine I click on the deal and opa I get a message saying that this stock can not be traded online please phone us to make an order so these are the two problems the sizes of trading are great well if I could not pay hundred and fifty pounds stock prices tend to be much lower the second problem is that for small investors like me indexed bonds are harder to negotiate they are less liquid than stock liquidity remember is how fast you can buy and sell one active if I had millions of pounds Investing inflation-linked bonds would be too liquid but not for the smaller ones That's why we might want to think about an alternative that is an inflation-indexed fund A fund is just a managed set of investments that can be actively managed We are a A highly skilled fund manager selects individual assets to buy and sell, but what we consider here are passive funds that tend to be cheaper because they provide access to a wide range of markets, set of mixed assets together good multi-asset funds the second benefit that is very relevant here is f liquidity quickly and cheaply because we are buying a set of assets we obtain a degree of diversification but in this case this is not particularly relevant to buy a very deep liquid can also reduce costs we are also buying experience of the fund manager fund come in many flavors here we will consider the funds traded on the stock market remember this is just illustrati and not expressing a preference for one type of fund over another in the UK, your options are quite limited. There are three main funds linked to inflation that they called trading on the stock market because you buy them and sell them as a stock, which means that markets are open you just look up the ticker that I showed here in red i NX gg IL I and IG IG and then just click buy or sell just as if it were a single stock phi NX geg ili are both linked to UK gilts the third is a global pool of inflation-indexed bonds not just UK but also from the US and Europe whenever you buy a fund it is always worth looking at the total expense ratio or if you buy one hundred pounds The amount of i NX ga expense ratio is percent which means you would pay 25 pence per year to the fund manager who is Blackrock G IL I only have an expense ratio of 0.7% so that you pay only 7 pence per year on your one hundred pound investment we can look at the new plug purely by the for purposes of use, in this case let's look at INX G you can
llustrative purposes in this case, let's look at INX G you can see the information in detail by downloading the data on the iShares website, for example, we can see that it cracks passively indexed securities inflation indexed by the UK government Bloomberg Barclays well is good because we want to track indexed bonds the current expenses are only two five percent the income invested in capital paid twice a year and it is comforting to see that the size of the fund is considerable, it is almost a billion pounds and of course it is popular for a reason that we can also see the main holdings in the lower right hand corner other words of the bonds in which 1 billion pounds is invested in the lower left, you can see how much the fund managed to track its benchmark, is usually within point 1 % each year ideally, we would run this tracking error at 0 to show the benefits of inflation protection we can have two f The fund manager is the same Blackrock both are based on UK government bonds, but the one on the left is not tied to inflation from the right. In XG, as we have seen, it is linked to inflation. The colored boxes represent the risks we run with each of the two different backgrounds. I showed four of the risks here and because the contents of the funds are so similar that they share three of these risks but the difference between the two is the risk of inflation and return are related so roughly could we say that the only difference between returns should be the compensation to take the risk of UK inflation, we will see how much this pays this would be the value of 1000 pounds invested in 2007 the red line is the inflation fund linked to the blue line is the gold fund that is not inflation bound in the panel below I showed the level of inflation that you are yes to the UK hopefully what you can see is that when inflation is high as in 2009 and again in 2012 the red line starts to rise above the blue line as protection of inflation increases the values ​​of those securities indexed inversely when inflati is very low, as in 2015, the brutes will, of course, surpass what is actually in It is teresante that most recently in 2016 we began to see these inflationary pressures rise again and as a result the index fund surpassed again is always worth looking at. For the risks of fraud, a key here is that if we have deflation, there is no protection from your principle in other words, if inflation goes into reversal and if there is deflation where the prices of goods and services are falling, then you can make a capital loss on your linkers and your background and also in small letters you can see that the UK credit rating may adversely affect the price of the fund, but certainly the UK would never be relegated well, actually yes, this could be a story in the FT, as recently on January 18 talking about the effect of brexit uncertainty on the credit rating of the UK and this is seen as a very material risk by many of the rating agencies, so this is something you should be aware of, and fine This is not a recommendation, but if you find it interesting, you can seek financial advice

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