At the end of 2009 inflation was clearly on the minds of investors around the globe, as the massive injections of liquidity into financial markets sparked fears of an inevitable uptick in prices. As the year has progressed, those fears may have retreated–deflation may be more of an immediate concern–but many remain convinced that investors will ultimately have to pay for the stimulus measures enacted in recent years.
Currently, there are a variety of ways to protect against rising inflation with ETFs; the Inflation Protected Bonds ETFdb Category includes seven funds, the largest of which is the ultra-popular iShares Barclays TIPS Bond Fund (TIP) (which has amassed over $20 billion in assets). While this segment of the market has grown in recent years, there is still a lack of options for accessing international inflation protected bonds; only the SPDR DB International Government Inflation-Protected Bond Fund (WIP), which is quickly closing in on the $1 billion dollar mark, invests in TIPS beyond the U.S.
iShares may soon have another horse in the TIPS race, offering a fund that is diversified beyond U.S.borders; the company recently filed for approval of a Global Inflation-Linked Bond Fund [also see TIPS ETFs: Looking Beyond TIP].
According to the filing with the SEC, this fund will seek to replicate the BofA Merrill Lynch Global Diversified Inflation-Linked Index, a market value weighted, capped total return benchmark designed to measure the performance of inflation-linked sovereign debt that is publicly issued and denominated in the issuer’s own domestic market and currency.
Additionally, the countries’ bond markets must meet a variety of criteria in order to be included in the index; the fund will not invest in any country that has defaulted on its debt and there must maintain $1 billion in qualifying debt in order to stay in the index [see all the ETFs in the ETFdb Inflation-Protected Bond Category].
As of the end of last month, the index consisted of 167 issues including securities from the following countries; Australia, Brazil, Canada, Chile, France, Germany, Greece, Israel, Italy, Japan, Mexico, Poland, South Africa, Sweden, Turkey, the United Kingdom and the United States. So while the proposed fund would have some similarities to WIP, there would be some major differences as well [also read 2010: Year Of The Bond ETF].
The exposure offered by WIP is “ex-U.S.” as heavy weightings in the UK and France combine to make up roughly 40% of the fund’s total holdings. The proposed iShares fund,on the other hand, would be more global in nature, offering exposure to a list of markets that includes the U.S.
According to the filing, with the exception of the U.S. Treasury, no issuer can hold greater than a 22.5% share of the underlying index, while no more than 48% of the underlying index can be comprised of issuers other than the U.S. Treasury that individually hold a 5% or greater share of the Underlying Index [also see Three International Bond ETFs For Europe's Bounceback].
So the new fund would be a blend between TIP and WIP, offering exposure to the global TIPS market. No ticker symbol or details on the expense ratio were included in the filing; TIP charges 20 basis points while fees for WIP come in at 0.50%.
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Disclosure: No positions at time of writing.