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Lyxor launches UK GBP inflation expectation ETF

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Lyxor has launched the Lyxor UK£ 10Y Inflation Expectations UCITS ETF, a new option for investors seeking exposure to inflation expectations.

The ETF is listed on the London Stock Exchange from 14th March. The bank writes that the launch is the world’s first ETF to provide exposure to UK inflation expectations. The index is designed to rise or fall with the market’s expected inflation rate, and hedge against interest rate changes.

Traditionally UK bond investors have used index linked gilts to hedge against inflation, which protect investors by adjusting coupons and capital repayments in line with inflation. However, inflation linked gilts are sensitive to interest rates. If rising inflation expectations were to translate into higher interest rates, linked gilts are likely to fall in value. 

Inflation Expectation ETFs are different because they capture the market’s expectations for inflation through a long portfolio of inflation linked bonds and a short portfolio of nominal bonds, leaving investors exposed to changing inflation expectations, and reducing the risk of rising interest rates.

The launch is the third Inflation Expectations ETF offered by Lyxor ETF. The Lyxor US$ 10Y Inflation Expectations UCITS ETF, launched in April 2016, has assets under management currently standing at USD537 million.
 
Adam Laird (pictured), Head of ETF Strategy Northern Europe at Lyxor ETF says: “This ETF addresses a growing problem: RPI was at 2.6 per cent in January, its highest level in a two and a half years and investors need protection. But when prices rise interest rates usually follow, which can hurt bond investors. Inflation expectations ETFs are a way to get the protection, but lessen the sting of a central bank rate hike.”

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