Inflation has been at record lows for years. Are investors still buying inflation protection?

Inflation may be low, but it’s certainly not forgotten. Inflation protection has been a big theme for investors in 2016. With €2.5bn of inflows into European listed inflation-linked ETFs year to date.* The general consensus amongst investors is that the risk is to the upside – nobody wants to be caught off guard.

Could inflation expectations rise?

We have enjoyed a few halcyon years, with interest rates falling and record low inflation. But it would be foolish to presume these conditions will continue forever. With fresh quantitative easing in Europe and the UK, the money pump is not drying up. There’s a real possibility that this excess liquidity could drive up inflation in the future.

We’re also mindful of energy prices. Cheap oil has kept costs low across the economy but this could change at the drop of a hat. If the tide turns, this will hurt everyone’s wallet.

What investments are available? Can ETFs work?

ETFs are a solid choice. They are low cost – vital when rates are low. And ETFs are transparent, so you always know exactly what you own. 

Many investors buy individual inflation linked bonds. Why use an ETF?

One key advantage of ETFs is their diversification. ETFs hold a portfolio of bonds, allowing investors to buy a range of issues in just one trade. Take the Lyxor EuroMTS Inflation Linked Investment Grade (DR) UCITS ETF (MTI  FP); it holds over 30 bonds from France, Italy, Germany and Spain.

Tell me about Lyxor’s ETF range

Lyxor offers a range of low cost inflation linked bond ETFs– covering UK, US and Europe. In particular, the Lyxor US$ 10Y Inflation Expectations UCITS ETF (INFU LN) and Lyxor EUR 2-10Y Inflation Expectations UCITS ETF (INFL FP) were the first of their type in Europe. When inflation rises, an interest rate hike often follows closely behind. We know this is a challenge for investors and we wanted to find a solution.

Our new ETFs should rise when expected inflation rises, but are duration hedged to give protection against rising interest rates. These have been very popular since we launched them in April – particularly the US Inflation expectations ETF.

Can inflation linked bond ETFs be used in tactical strategies?

For most portfolios, keeping pace with inflation is a long term goal. The beauty of ETFs is that they can also be traded tactically by investors who wish to express shorter term views.  Given the recent uncertainty around oil prices and Interest rates in the US we have seen increased flow is into inflation linked bond ETFs from both strategic and tactical investors.

>> For more information on Lyxor ETF and their range of inflation protected ETFs, visit www.LyxorETF.se

*Source: Lyxor International Asset Management, Bloomberg. Data as at 01/09/16.

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