UBS Asset Management has listed a new suite of ETFs which seek to mitigate inflation risk by tracking a benchmark of US Treasury Inflation-Protected Securities (TIPS).
The ETFs track the Barclays TIPS 1 – 10 and Barclays 10+ indices. UBS writes that the new ETFs provide transparent and structured exposure to the US TIPS market, including in currency-hedged versions.
The company explains that the key difference between a nominal and inflation-protected security is that the principal amount of a TIPS issue is adjusted over time to reflect changes is the underlying Consumer Price Index (CPI). The fixed coupon rate for the TIPS issue is applied to its principal amount, which varies accordingly over time in response to the rate of inflation or deflation.
To illustrate this, UBS suggests a scenario of a USD1,000 investment in a newly issued 10-year TIPS with a 1 per cent coupon. If inflation were to grow at 2 per cent over the next year, the face value of the TIPS product would be adjusted to USD1,020. The annual accrued interest would amount to USD 10.20 (1 per cent x USD 1,020).
The UBS ETF Barclays TIPS 1-10 UCITS ETF and the UBS ETF Barclays TIPS 10+ UCITS ETF provide exposure to TIPS of shorter and longer duration. In addition, the currency-hedged versions allow investors to participate in USD funded investments whilst mitigating the impact of adverse currency fluctuations.
Andrew Walsh, (pictured) Head of UBS ETF Sales UK & Ireland, says: “There is growing sentiment in markets that inflationary pressures may start to rise again after an extended period of low interest rates and the potential impact of nascent signs of fiscal stimulus from the US and elsewhere. With this innovative suite of ETFs our clients our able to protect long-term purchasing power and gain access to an asset class that compounds the real rate of return.”